Moody's referrs to a need for greater investments in order to maintain economic growth in Greece over the medium term, while also adding that the country's debt is "manageable" over the next 10 years. In a report released on Thursday,
Moody's primary scenario - a Greek debt of 180 percent of GDP - will begin to decrease as of 2019 and afterwards, and will remain high for the next few decades.
The Moody's report reads:
"Greece's (B3 positive) credit profile is supported
by the substantial debt relief granted by the country's euro area
creditors in June, Moody's Investors Service said in an annual report
today.
The debt relief package ensures that Greece's debt-service obligations
will be very manageable over the next 10 years, supporting the
government's return to private capital market funding after a decade of
reliance on official-sector financial support.
The report, "Government of Greece - B3 Positive, Annual credit analysis",
is available on www.moodys.com. Moody's subscribers can access the report
using the link at the end of this press release. The research is an
update to the markets and does not constitute a rating action.
"The debt relief package is a significant benchmark in Greece's recovery
from its deep economic, fiscal and financial crisis," said Kathrin
Muehlbronner, a Moody's Senior Vice President and author of the report.
"It reflects both the significant progress achieved by the Greek
authorities in correcting the causes of the crisis and the strong and
continuing support from Greece's euro area creditors."
As part of the debt relief, Greece will remain under the close supervision
of its euro area creditors, a credit positive in Moody's view as it
should ensure that the Greek authorities remain on a reform path.
The Greek government has made major progress in the fiscal area. It
achieved large primary surpluses of around 4% of GDP over the past two
years, and has committed to a primary surplus of 3.5% of GDP for the next
five years, which should be broadly achievable. Tax collection has been
improved and spending reduced on a structural basis. Progress has also
been made to bring Greece's previously weak and politicised institutions
in line with European standards. The Greek authorities have legislated
measures to strengthen the key institutions' effectiveness and
operational independence. This gives some confidence that the risk of
reform reversal has declined.
In Moody's base case scenario, Greece's very high debt burden -- at
nearly 180% of GDP one of the highest in Moody's sovereign rating
universe -- will start to decline from 2019 onwards, but will remain very
high for decades to come. The combination of very long debt maturities
and low interest rates mitigate the risks from such a high debt level,
but Greece might well require further debt relief in the early 2030s, as
acknowledged by the euro area.
Greece also needs stronger investment to sustain economic growth over the
medium term. Compared to other euro area countries emerging from
recession and crisis, Greece's investment performance has been very weak,
with capital formation standing at just 40% of its pre-crisis level.
While the government has committed to reduce the high corporate tax rate
and more generally work towards creating a more business-friendly
environment, it remains to be seen how quickly such changes will bear
fruit. In Moody's base case, economic growth prospects will remain
moderate, with real GDP growth of 2% forecast for this year and next.
The banking sector remains a key vulnerability, despite recent
improvements. On a stand-alone basis the systemic banks remain weak, with
poor asset quality, low profitability and a large share of lower-quality
capital in the form of deferred tax assets. Banks will have to
significantly accelerate the disposal of non-performing assets on their
balance sheets in order to achieve the targets agreed by the end of next
year.
Greece's sovereign credit rating could be upgraded if the government's
good record of implementing reforms is maintained beyond the end of the
adjustment programme. This in turn could result in stronger-than-expected
and sustained economic growth and a more rapid reduction in the public
debt ratio. Faster-than-expected improvements in the banking sector's
health would also be positive.
Downward pressure on the rating could develop if the Greek government
were to deviate from its commitments and reverse reforms, or if tension
with official creditors re-emerged. This would jeopardize the euro area's
support for the country."
