Why Moody’s keeps Greece in ‘junk’ status
A few days after raising the outlook of Greece’s credit rating to “positive,” Moody’s referred to the factors that contributed to Greece’s Ba1 rating and prevented the granting of investment grade to the country.
Greece’s credit profile, the rating agency noted, is determined by four factors: Economic power, the strength of institutions and governance, fiscal strength and the country’s vulnerability to event risk.
Moody’s argues that Greece has a rather mediocre score in economic power because its economy is less diversified than those of its European Union peers and still has a low – albeit rising – investment index. The efficient absorption of resources from the EU’s Recovery Fund will be crucial for the strengthening of investments and midterm growth, it notes.
Regarding the strength of institutions and governance, Moody’s notes an improvement, though challenges remain.
Structural reforms have already brought some tangible progress in sectors such as tax administration and compliance, Moody’s noted. While it will take a multi-year commitment to fully reap the benefits of the institutional changes that are under way for the creation of a modern and efficient public administration, these improvements are starting to be reflected in governance indexes.
The agency also notes that despite the progress and modernization of the judicial system, the improvement in its quality and efficiency and the monitoring of corruption will remain difficult, with potentially negative effects on the business and investment environment.
Greece’s fiscal power is considered weak, mainly because the country continues to have one of the highest debt indexes internationally and is expected to see it remain above 120% of gross domestic product for most of the 2030s. Still, Moody’s acknowledges this dropped from 207% in 2020 to about 162% in end-2023, and up to 2025 it anticipates a further considerable reduction by over 15 percentage points.
Furthermore, Greece has high potential obligations, mainly from broader public sector entities in financial services, that could affect negatively the fiscal strength if reflected on the government budget.
Finally, Greece is sensitive to event risks, which is determined by four criteria: Political risk, that of the credit system, the liquidity risk and the level of vulnerability of the economy to external economic shocks.
On the political front, although there is a domestic stability, which is credit positive, being a NATO member Greece is exposed to the geopolitical changes in Europe in light of the war in Ukraine.
While several challenges remain for banks, things have improved significantly, so that the risk of a credit crisis that would have required support from the state has subsided.
The risk of a liquidity crisis is low thanks to the favorable structure of the public debt and the very high cash reserves. Greece has also improved its resilience against external economic shocks, since it has reduced its current account deficit and Moody’s expects that in 2025-2026 this will declined further to 5% and 4.4% of GDP respectively, from 6.3% last year.
