Greece’s ‘biggest turnaround’: From junk to investment grade

by The Insights

More than a decade after bailouts and austerity measures pulled Greece from the brink of bankruptcy and an exit from the euro zone, the country has rebounded and is on the verge of regaining its investment grade .

S&P recently changed its outlook for the country from stable to positive. A full upgrade would put Greece at triple B minus, the rating agency’s lowest rating.

Many, including the country’s central bank governor, expect the upgrade to come after the May 21 election if the new government pursues reforms and maintains political stability.

The ruling conservative party, New Democracy, has a five to six point lead in the polls ahead of Syriza, the radical left opposition party. However, he is expected to struggle to form a government after the first round of voting, with the Greeks expected to return for a runoff in July.

Fokion Karavias, chief executive of Greek lender Eurobank, said a return to investment grade – to which not only government borrowing costs, but also those of local lenders and corporations are inextricably linked – would signal “the most major shift in the European financial system”.

“There [had been] many voices are asking Greece to leave the euro zone. They argued that the country’s debt would never be sustainable, that it would be impossible to achieve primary surpluses, and that its banking system would not be able to reduce its stock of bad debts,” he said. “In the end, nothing is impossible.”

After being Europe’s problem child for years, growth in Greece is now exploding. The economy has seen one of the strongest recoveries from the Covid-19 pandemic, with gross domestic product growing 8.4% in 2021 and 5.9% last year.

A masked pedestrian in Athens in January 2022. The Greek economy has shown one of the strongest post-pandemic recoveries © Nick Paleologos/Bloomberg

Figures from Eurostat, the EU’s statistics office, show that Greece recorded a primary budget surplus of 0.1% in 2022. The amount of now non-performing loans on banks’ balance sheets has fallen from over from 50% in 2016 to close at 7%.

Economists at ratings agencies and investment banks such as Goldman Sachs expect Greece to continue to outperform the bloc this year and next.

This is a far cry from February 2012, when the country’s credit rating approached the lowest rating — selective default — following a debt crisis that threatened to tear the eurozone apart.

The lack of investment grade status led to higher funding costs and meant that for a time the European Central Bank was prohibited from buying Greek debt under its programs. purchase of multi-trillion euro bonds to stabilize the bloc’s economy.

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It’s been hard to get to a point where joining the investment-grade club — a status granted by S&P to just 70 countries — becomes a real possibility.

Painful austerity measures have left their mark on a country that now has one of the highest relative poverty rates in the EU. At €832 a month, the country’s minimum wage is €30 lower than it was in 2010. In real terms, the average wage is around a quarter lower than it was 12 years ago .

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After falling nearly a quarter from the nadir peak, Greece’s output remains significantly below pre-crisis levels. Giorgos Chouliarakis, economic adviser to the governor of the Greek central bank, believes that a return to the top “requires another decade”, while only “a serious multi-year investment plan in human capital, key infrastructure and services health” will drive up wages.

“Many households are feeling the pressure of rising prices for food, energy and other basic goods,” said Nikos Vettas, chief executive of IOBE, an Athens-based economic think tank.

The reforms not only stabilized a plummeting economy, but also led to real improvements. Chief among them is trade: between 2010 and 2021, the country’s goods exports grew by 90%, compared to 42% in the eurozone as a whole.

“Greece’s greatest achievement over the past decade has been exporting,” said Dimitris Malliaropulos, chief economist at Greece’s central bank. However, a significant factor has been “outright” wage cuts, he added. “The price of this improvement was high.”

The pain is now starting to pay off.

After soaring to 206% during the pandemic, Greece’s public debt as a share of GDP fell to 171% last year, its lowest level since 2012 and one of the fastest rates of debt reduction in the world. world. It should continue to fall in 2023, helped by high inflation.

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“In principle, the winners from high inflation are those with lots of inflation-linked income and few inflation-linked liabilities,” said Chris Jeffery, head of inflation and rates strategy at Legal & General Investment Management. The country is also relatively less exposed to higher regional borrowing costs, with the average maturity of its debt being 20 years, compared to seven years for the average advanced economy.

“Greek nominal GDP has now increased by more than 25% over the past two years. Their nominal debt only increased by 4%,” Jeffrey said. “Another great improvement [in the debt-to-GDP ratio] is likely this year, bringing back an upgrade to investment grade before long.

Covid helped boost incomes by forcing people to use easier-to-trace electronic payments as stores closed. “Economic activity that was in the dark has now been exposed and taxed,” Malliaropulos said.

Greece has also benefited from an increase in foreign direct investment, which rose 50% last year to its highest level since records began in 2002. The EU’s post-pandemic recovery fund is expected to provide 30.5 billion euros in grants and loans to Greece by 2026, equal to 18% of current GDP.

Tourism – the largest sector of the Greek economy, accounting for around a fifth of GDP – rebounded last year to 97% of pre-pandemic levels. Foreigners not only spend their holidays in the country, but also invest heavily in real estate. Property sales to foreign buyers were almost four times higher last year than in 2007, reaching almost 2 billion euros.

Construction, the sector hardest hit during the financial crisis, is also booming. Haris Kokosalakis, whose construction activity collapsed in 2012, said demand from overseas buyers had given him some “hope” for a sustained recovery.

“If it weren’t for our foreign customers, I would be very pessimistic,” he said. “I still fear that we are back in 2007, about to face another crash.”

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