Greece’s “greatest turnaround”: From junk to investment grade

After more than a decade of bailouts, austerity and other measures that saved Greece from bankruptcy and the exit of the eurozone, the country is now on the verge of regaining investment grade rating.

S&P recently changed the outlook for the country to positive. If Greece were to receive a full upgrade, it would be rated triple B-minus by the rating agency.

The country’s Central Bank Governor expects the upgrade to happen after the May 21, 2018 elections, should the new government maintain political stability and continue reforms.

Syriza is the radical left party in opposition. The conservative New Democracy, which rules the country, has an advantage of 5 to 6 points. It is still expected that it will struggle to form the government after the first voting round, and Greeks are set to return to the run-off in July.

Fokion Karavias is the chief executive officer of the Greek lender Eurobank. He said that the return to investment-grade, which affects not only government borrowing costs, but also local lenders, corporates and their own, would be “the biggest turn around in the European Financial System”.

Many voices had called for Greece to leave the Eurozone. He said that they were saying that the country’s financial situation would not be sustainable and that primary surpluses will never be possible. They also claimed that the banking system wouldn’t be able reduce its bad loan stock. “In the end nothing is impossible.”

Greece’s growth is now exploding after years of being Europe’s problem-child. The Economy recovered from the Covid-19 Pandemic in one of the most impressive ways. Gross domestic product grew by 8.4 percent in 2021, and 5.9 percent last year.

Eurostat’s figures show that Greece had a primary budget surplus of 0.1 percent in 2022. In 2016, the amount of non-performing loans on bank balance sheets had increased to more than 50%. Now, it is closer to 7%.

Rating agencies and investment firms such as Goldman Sachs predict that Greece will continue to outperform other countries in the EU this year and next.

The country’s rating is now a long way from the February 2012 when it was close to selective default, the lowest credit rating. This followed a debt crises that threatened to split the eurozone.

Due to the lack of an investment grade status, financing costs were higher and the European Central Bank (ECB) was temporarily prohibited from purchasing Greek debt in its multi-billion euro bond buying programmes for stabilizing the economy of the EU.

It has been difficult to reach a point at which joining the Investment-Grade Club — a designation bestowed by S&P only on 70 countries — becomes a reality.

Austerity measures that were painful have had a lasting impact on a nation with one of the highest relative poverty rates in the EU. The minimum wage in the EU was EUR832 per month until just a few months ago when it was increased to EUR910 per monthly.

Greece’s production has shrunk by almost a quarter since its peak, and is still significantly below the pre-crisis level. Giorgos Chuliarakis is the economic advisor to the Greek governor of central bank. He believes that a return to a peak will take another decade, and only “a multiyear plan for serious investment in human capital, infrastructure, and health services” can boost wages.

Nikos Vettas is the general director of IOBE in Athens.

Reforms not only stabilized an economy in freefall, but they also led to real improvements. The most notable is the trade: from 2010 to 2021, goods exports in the country grew by 90 percent, compared to 42 percent for the entire euro zone.

Dimitris malliaropulos is the chief economist at the Greek central banks. He said that exports have been Greece’s greatest success over the last decade. He added that “outright” wage cuts were a major factor. “This improvement came at a high price.”

Now, the pain is beginning to payoff.

After soaring to 206 percent during the pandemic in Greece, the government debt proportion as a percentage of GDP dropped to 171 percent last year. This was its lowest level since 2012. It also represented one of the fastest rates of debt reduction anywhere in the world. The debt is expected to continue falling through 2023 due to high inflation.

Chris Jeffery is the head of Legal & General Investment Management’s inflation and rates strategy. He said that “in principle, those who have a lot of inflation-linked revenue and not a lot of inflation-linked liability are the ones to benefit from high inflation.” The country also has a lower exposure to regional borrowing costs because its average debt maturity is 20 years compared to seven years in the average advanced economy.

The nominal Greek GDP has risen by over 25% in the past two years. Jeffrey said that their nominal debt has only increased by 4 percent. “Another big improvement [in debt-to GDP ratio] is expected this year. This will bring an upgrade to investment grade within the next few months.”

Covid raised revenues by forcing customers to pay with electronic payment methods that are easier to track as stores closed. Malliaropulos said that “economic activity which was hidden has been revealed and taxed.”

Greece also has benefited from an increase in foreign direct investments, which grew by 50 percent last year and reached its highest level ever since records began. By 2026, the EU’s Post-Pandemic Recovery Fund will provide Greece with EUR30.5bn in grants and loans. This is equal to 18% of its current GDP.

The tourism sector — which accounts for one-fifth the GDP of Greece — recovered last year to reach 97% of its pre-pandemic level. In addition to holidaying in Greece, foreigners are investing heavily in real estate. Last year, property sales to foreign buyers reached almost EUR2bn. This is almost four times more than 2007.

Construction, which was the worst-hit industry during the financial crises, is also on the rise. Haris Kokosalakis’ construction business, which collapsed in 2012 due to lack of demand, has a “slight hope” that the recovery will be sustainable.

He said, “If not for our foreign customers, I would be pessimistic.” “I fear that we’re back in 2007 and about to experience another crash.”

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