Greece: Continued Debt Reduction Supports Favourable Credit Trajectory

Scope Ratings (Scope) projects that Greece (rated by Scope BBB- and Positive Outlook)’s general government debt ratio will fall to 150.5% of GDP by the end of this year and to 132.8% by 2029 (Figure 1), from a peak of 207% in 2020. If achieved, the 2029 figure would represent Greece’s lowest debt-to-GDP ratio since the beginnings of the Greek crisis in 2009, and below the debt ratio of Italy (rated by Scope a higher BBB+) by 2027. Our projections take into account an expected early repayment this year of EUR 7.9bn in Greek Loan Facility tranches due in 2026, 2027 and 2028.

Figure 1. Greece and Italy general government debt projections

Baseline scenarios for Greece and Italy and stressed economic scenario for Greece, % of GDP

Scope’s debt projections recognise recent budgetary outperformance. We expect the government will meet or even slightly exceed its 2024 primary surplus objective of 2.1% of GDP. We have furthermore updated our assumption for the primary fiscal surplus to average 2.5% of GDP over 2025-27 – the remainder of the term of prime minister Kyriakos Mitsotakis.

Our assumptions consider Greece’s Medium-Term Draft Budgetary Plan recently submitted to the European Commission. The budget proposes a net EUR 2.9bn of permanent expansionary discretionary measures (or 1.2% of GDP) for next year after an estimated EUR 1.8bn (0.8% of GDP) for 2024.

Fiscal adjustments are mainly on the expenditure side, focusing on public-sector wage reform and pension hikes. But they also include reductions in social security contributions of 1pp from January 2025. Budgetary accommodation mainly uses available fiscal space after recent positive revenue developments from favourable growth and improved tax compliance.

The sustained prioritisation of elevated primary surpluses even after exits from enhanced bailout surveillance has been surprising and has bolstered our confidence in the government achieving headline budget deficits of 0.5% of GDP on average a year over 2024-26, ahead of the next parliamentary elections.

Robust Economic Growth Outperforms Euro-area Averages

Scope’s projections for government debt levels assume output growth of 2.4% for this year and 1.9% for 2025, modestly revised up from our July estimates. If realised, Greece’s economic growth would outperform that of the euro area, which we estimate at around 1.0% for this year and 1.5% in 2025.

Recent above-trend growth for Greece has been fuelled by strong tourism proceeds, robust private consumption (deploying remaining savings from the pandemic crisis), and better investment given strengthened investor confidence. Our average growth estimate of 1.4% from 2026 to 2029 optimistically assumes no meaningful crisis out to 2029 and no annual recession over that horizon.

Greece has maintained progress on reforms and investments of Greece 2.0, the Recovery and Resilience Plan (RRP), and the EU Cohesion Policy. On 16 October, the European Commission disbursed the fourth payment of EUR 998.6m in grants from Greece’s EUR 35.9bn Recovery and Resilience Plan. A total of 51% of all RRP funding has been paid out to date.

While investment today is higher than before the pandemic, it remains low at just 14% of output in the year to Q2 2024. That is below the euro-area average of 21%.

Enhancing labour market flexibility remains a priority. Unemployment had declined to 9.5% of the active labour force by August of this year, from June 2020 peaks of 20.4%. Although unemployment is near its lowest since 2009, it remains meaningfully above the EU average of 5.9%. We see Greek unemployment averaging 10.0% this year and 9.6% in 2025.

Improving Banking System Resilience, Declining NPLs and Government Holdings

Greek banks have made further progress in reducing non-performing loans (NPLs). System-wide consolidated NPLs had fallen to 6.9% in June of this year from 49.1% in June 2017, although the ratio remains above the 1.9% average for the EU. Scope expects Greek NPLs to continue declining as the banks remain committed to further balance sheet clean-up.

Banks’ significant holdings of domestic government bonds and state guarantees under the Hercules securitisation programme reinforce the sovereign-bank nexus. This continues to be an economic concern, although inter-linkages have diminished as the government exits its stakes in the banks.

The Hellenic Financial Stability Fund (HFSF) recently completed the sale of 10pp of its 18.4% holding in National Bank of Greece via a marketed share offering. HFSF expects to transfer the final 8.4% to the sovereign wealth fund. The HFSF sold its final 8.9781% stake in Alpha Services and Holdings to UniCredit in November of last year and sold the final 27% stake in Piraeus Bank this March. Its remaining holding is 72.5% of the smaller Attica Bank.

Challenges for Greece’s Credit Rating

Scope affirmed the BBB- investment-grade rating of Greece in July and changed the Outlook to Positive from Stable to account for favourable developments. Nevertheless, Greece’s credit ratings remain challenged by its elevated government debt ratio, the second highest of Scope Ratings’ 40 publicly rated sovereigns after Japan.

As Greece finances itself in markets and repays bailout loans early and as the European Central Bank continues quantitative tightening, the structure of its debt is gradually weakening. Net interest payments are increasing as the sovereign refinances via more expensive market issuance, from 6.3% of revenue this year to a forecast 7.9% by 2029. The long weighted-average debt maturity of 19.2 years is also gradually declining.

Scope Ratings’ next scheduled publication on Greece’s sovereign rating is due by 6 December this year.

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Dennis Shen is a Senior Director in Sovereign and Public Sector ratings at Scope Ratings GmbH, and primary analyst for Greece’s sovereign rating. Keith Mullin, senior writer at Scope, contributed to drafting this commentary.