Unwarranted Bullishness about Hellenic Republic Debt


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By Pascal vander Straeten September 15, 2023

The lesser known rating agency, DBRS, has upgraded:
– the Hellenic Republic’s Long-Term Foreign and Local Currency – Issuer Ratings from BB (high) to BBB (low). Stable outlook.

However, the ratings with S&P/Fitch/Moody’s for Greece are at respectively BB+/BB+/Ba3 with a positive outlook for all three rating agencies. This means that a rating upgrade in the next 12 months is not unlikely.

Capital markets share a similar favorable view on Greece with the 5-year CDS being at 73.25, down from 195.19 in October 2022 (Source). This value reveals a 1.22% implied PD, assuming a 60% LGD. Based on the RiskCalc method, this would correspond to an implied credit rating of Baa2.

While, for 2022, the Greek economy has shown resilience, both in GDP and fiscal terms (respectively 5.9% and 0.1% surplus), the level of debt remains excessive, at 171% of GDP.

It is worth remembering though that on February 21, 2012, EU Finance ministers approved the second EU-IMF bailout for Greece, worth 130 billion euros ($172 billion). The deal included a 53.5% haircut for private Greek bondholders. In exchange, Greece committed to reduce its debt-to-GDP ratio to 120.5% by 2020 (Source).

In the period 2012-2019, the Greek debt averaged 180% of GDP, and for 2020 it even reached 206% (Source).

Since 2020, the debt/ GDP ratio went down thanks to strict budgetary controls and a strong economy. However, the current 171% debt/GDP is a far cry of the 120% that was mandated by the EU-IMF for 2020.

Yet, the Greece debt rating with DBRS was upgraded out of junk status to investment grade.

The public debt/GDP ratio is expected to fall to 162.2% in 2023 and 154.4% in 2024, a projected 50pp decline from the high of 206% reached in 2020. However, a 154.4% debt/GDP ratio remains still three times the ‘BBB’ median of 55.6%.

While Greece has achieved remarkable performances, particularly considering the impact of covid19, DBRS’s rating upgrade on Greece is most likely partially politically-driven, with DBRS trying to profile itself and snap some market shares away from the established rating agencies.

In sum, a BBB rating is not yet warranted.

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