Credit rating provider Morningstar DBRS has upgraded the Greek economy’s Long-Term Foreign and Local Currency rating to BBB, changing the outlook from positive to stable.
The upgrade reflects Morningstar DBRS’s view that legacy risks in the banking system have receded, along with a continuation of overperformance in fiscal targets.
Greek banks have improved their fundamentals, are more resilient, and are well-positioned to provide credit to the economy, even after the end of the Next Generation EU (NGEU).
This reflects lower legacy risks, with a significant decrease in the gross non-performing loan ratio, now close to the European Union (EU) average, coupled with the expectation that deferred tax credits (DTC) will decrease faster than initially anticipated.
Furthermore, backed by the recovery of the Greek economy and strong investor interest, the Hellenic Financial Stability Fund (HFSF) has reduced its stakes in systemic banks, thereby loosening the connection between the state and the banking sector.
Morningstar DBRS also notes that the public debt-to-GDP ratio should have declined by almost 10 percentage points since 2023 to an estimated 154 percent YE2024. Fiscal revenues continue to overperform targets with rising primary surpluses, which are expected to remain elevated going forward.
This will likely facilitate a significant further reduction in the public debt-to-GDP ratio, which is projected to fall below 140 percent by 2027, according to the government. The credit rating action is supported by improvements in the “Monetary Policy and Financial Stability” and “Fiscal Management and Policy” building blocks of the Greek economy.
A stable trend
The stable trend reflects Morningstar DBRS’s view that the risks to the credit ratings are balanced. The Greek economy’s BBB credit ratings are underpinned by a credible policy framework, thanks to EU and Euro area membership, and by the implementation of past institutional and economic reforms that have enhanced the economy’s resilience.
Greece’s economic prospects appear to be considerably strengthened by governance, investments, exports, and reforms, underpinning public sector debt sustainability.
The implementation of structural reforms remains on track, which, along with higher investments supported by EU resources, could improve the country’s business environment, boost productivity, and help narrow the investment gap with its euro area peers.
Since 2021, Greece has been outperforming euro area average growth, and this is likely to continue over the next two years. GDP is estimated to have expanded by 2.2 percent in 2024 while it will grow by 2.3 percent in 2025, according to the Greek Ministry of Economy and Finance.
Furthermore, there is a strong political commitment to maintaining a prudent fiscal strategy, as evidenced by the rapid improvement in the primary surplus despite the multiple shocks the economy has faced since 2020.
Nevertheless, the credit ratings are constrained by the still high public debt ratio, the small size of the Greek economy, and the persistent current account deficit.