S&P: Weakened private sector is a threat

The key to the further upgrading of Greece’s credit rating is strengthening growth and investment, Standard & Poor’s chief analysts for Greece Aarti Sakhuja and Frank Gill tell Kathimerini in an interview. They warn that, despite the Eurogroup agreement, Greece continues to have high public and private debt, elevated unemployment and a credit system which still has to deal with a mountain of bad loans.

S&P Global Ratings raised its credit ratings on Greece ahead of schedule to B+ from B – only one notch. What kept S&P from giving the country a bigger upgrade?
Greece still has high stocks of public and private debt, elevated unemployment, and a banking system struggling under significant levels of bad loans. We think the key for the rating going forward will be a strengthening of growth. That might come via rising foreign direct investment inflows, better performing exports, reforms to the business environment to stimulate hiring and private investment, or a continuation of the cleanup of banks’ balance sheets. There have been many unsettling changes in Greece since 2008, such as losing a large proportion of its highly skilled workers via net emigration. This has also weighed on growth, competitiveness and tax receipts.

What will it take for Greece to be upgraded to investment grade and could this happen soon?
How the rating evolves will depend upon numerous factors, including possible reforms to improve Greece’s business environment, the strength and sustainability of the economic recovery, as well as the pace of any further reduction of the banking system’s nonperforming exposures. It isn’t just public debt which is high. Private debt is elevated as well, so the weak financial capacity of the private sector could render the economy vulnerable over the next few year. On the other hand, if jobs and investment come, that will benefit Greece’s public finances, the banks, and possibly the rating.

In the report you mention that you expect the cash buffer to fully cover Greece’s needs until 2021 and partly cover repayments coming due in 2022. Do you think that Greece’s debt is sustainable until 2022? And do you see an increase of the refinancing risks after 2022?
Based on the current amortization schedule, the creation of the cash buffer and our expectation of broadly balanced government finances, we expect that refinancing risks for the government will be significantly lower until 2021 and some part of 2022. Beyond this time horizon, we believe the cost at which Greece accesses capital markets will depend on various factors, including market conditions, the strength of the economic recovery, policy predictability including fiscal policy, and any additional buffers the government has built up during this time.

Do you view the Eurogroup’s deal on debt as a positive sign for the markets?
We believe that the debt relief offered by Greece’s creditors, along with the cash buffer and further commitments to revisit debt sustainability in the future, are important signals and reinforce the creditors’ commitment to lighten Greece’s official debt burden. We anticipate that this is likely to help improve Greece’s market access rather than enable it.

S&P highlights the need for Greece to attract foreign direct investment, as you mention that this is one of the factors that could lead to an upgrade. How can Greece see an investment boost?
Net foreign direct investment inflows have improved since 2016, averaging slightly over 2 percent of GDP per year. Unfortunately, the absolute levels of public and private investment spending today are still half what they were in real terms in 2005. Given high public and private debt levels for Greek residents, the most powerful potential source of new investment is almost certainly going to have to come from outside of Greece, via foreign capital inflows. Stable policy making, predictable property rights, an efficient judicial system and reforms targeted at improving the business environment are likely to improve Greece’s ability to attract foreign investment. Of course another key source of investment could be public spending, not least on education.

S&P’s projections for primary balance/GDP for 2019-2021 are much lower than the post-bailout targets of a primary surplus of 3.5 percent of GDP until 2022, so, in your view, Greece will not be able to meet these fiscal obligations.
We view the medium-term primary surplus target of 3.5 percent of GDP as a highly ambitious one. We project lower primary surpluses than targeted because we don’t rule out the possibility of a more flexible approach from Greece’s creditors towards its compliance with this target.

Have you identified progress on the reduction of Greek banks’ nonperforming assets? And what hurdles do you see to the improvement of their loan books?
We anticipate that the banking sector will continue to reduce the stock of nonperforming assets, primarily through write-offs but also through other avenues such as asset sales and out-of-court workouts. Stronger economic growth would likely improve recoveries and support loan restructuring. Reforms directed at identifying and improving recoveries from strategic defaulters could prove helpful. Even then, given the size of the nonperforming assets relative to the overall loan book, we anticipate that progress will be gradual.