DBRS upgrades Greece’s rating, but brings outlook down to Stable

Canada-based rating agency DBRS has upgraded Greece’s credit rating to BB (low) from B (high), but has changed the country’s outlook from Positive to Stable, citing the very high debt ratio and the huge volume of nonperforming exposures that remain in Greek banks’ portfolios.

In its rating report published late on Friday DBRS noted that “Greece and the European institutions have successfully concluded the first and second Enhanced Surveillance monitoring reviews. The release of the first tranche of policy-contingent debt measures has been approved and a close to 1-billion-euro disbursement, including returning SMP/ANFA income, is pending.”

DBRS expects the economy to grow by 2.3 percent this year, citing the official Finance Ministry estimate, from 1.9 percent in 2018. “We expect the fiscal target for 2018 to have been exceeded. Moreover, Greece has returned to debt capital markets,” its adds to back its rating upgrade.

It also noted that its decision to change the trend from Positive to Stable reflects the likelihood that Greece will continue on its reform path including reducing banks’ NPEs: “At the same time, the debt ratio remains at a very high level and achieving an appropriate fiscal mix, while at the same time delivering primary fiscal surpluses, remains a challenge in the medium term. In addition, NPEs are currently at a very high level, restricting banks’ capacity to support the real economy,” it warned.

DBRS further pointed out that Greek unemployment may have declined but remains the highest in the EU, and “the recent increase in the minimum wage by 10.9 percent, despite the positive impact that it could have on domestic demand and growth in the short term, could have negative implications for employment in the medium term.”

The agency also considered that “the continuation of the reform effort and the safeguarding of the reforms that have already been adopted, will support Greece’s ability to remain on a sustained growth path. In the longer term, the challenge of sustaining primary surplus over many years to meet debt service payments raises questions in the context of the high debt stock.”

On the political level DBRS remarked that “the latest opinion polls show that center-right New Democracy is leading by almost 10 percentage points,” and that “the increased political stability observed over the last few years is likely to be maintained and we do not expect any policy reversals under a potential New Democracy-led government.” It rated as positive the recent dissociation of a failed election for a Greek President in Parliament from the holding of a snap general election.