Country risk: Greece is on the long road back

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By:
Jeremy Weltman
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There are still huge obstacles ahead for the high-risk, tier-5 borrower, but the improvement in Euromoney’s country risk survey has been matched by credit rating upgrades and lower borrowing costs.

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The news that Fitch has upgraded Greece from CCC to B- did not come as a shock to ECR experts.

Two years ago, Greece reached its lowest point, but its risk score has since improved to its highest level in four years as analysts have factored in steadily improving economic and political developments.

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Investors will not get carried away just yet.

Greece is still among the highest-risk sovereign borrowers worldwide, a tier-5 borrower in Euromoney parlance, nursing a general government gross debt burden totalling 176% of GDP.

It’s a long way back for a country that has seen its score dive 47 points since the global banking crisis began a decade ago – the biggest fall of any country surveyed.

No fewer than 12 of the 15 economic, political and structural risk indicators included in Euromoney’s survey score less than half the 10 points available for Greece. Many are languishing around 2 or 3 points out of 10.

There are concerns about data quality. Unemployment is affecting around a fifth of the workforce. There have been attacks on business property by anarchists, and regular protests, highlight social instability.

The government is in for a tough time again in the next few months as the IMF raises objections to the primary surplus. The target of 3.5% of GDP for 2018 looks likely to be missed.

The IMF is moreover demanding that Greek banks undergo asset quality reviews in return for signing off the third bailout, undermining relations with the ECB providing its own risk testing. Estimates suggest €10 billion of bank sector capitalization is required.

At home, the government seems to be reviving some of its more radical policies to appease core supporters, partially taking a swipe at foreign investors.

The tax authorities are targeting high-worth individuals, tourism projects are stalling under the weight of bureaucracy, and legal interference is illustrated by ongoing arbitration involving Eldorado Gold Corp (a Canadian investor) delaying its gold-mining project.

Positive signs

But the tide is turning.

Rising four places this year, to 110th out of 186 countries, Greece is keeping pace with Montenegro in Euromoney’s survey, and has leapfrogged Guyana, Liberia, Jamaica and Uganda in the global risk rankings – all B-level sovereigns among those that Fitch, Moody’s and S&P monitor. 

Optimism was fuelled by the successful bailout review in June, ending six months of uncertainty, and releasing fresh financing in return for more spending cuts and reforms.

It was followed, in July, by a return to international markets for the first time in three years, enabling Greece to sell €3 billion of five-year bonds, improving its capital access score in Euromoney’s survey.

“There is increased interest in Greek government bonds at a time when the liquidity conditions of the Greek economy have improved and investment trends are characterized by a ‘search for yield’ attitude” says Dimitria Rotsika, an economist at Piraeus Bank Group, and a contributor to ECR’s survey.

Indeed, the positives have kept on flowing.

Presently, the government is expecting 2% real GDP growth this year.

This is downgraded, and may be closer to 1.5%, but with tourism doing well, confidence returning, and global trade thriving, it would still be the strongest pace since the crisis began, contrasting with the years of abject decline caused by austerity.

The unemployment rate is slowly declining, there is already a primary budget surplus (excluding debt-servicing), and a new state development bank is planned for 2018, providing financing for cash-starved small and medium-sized enterprises.

Political stability has also improved.

University of Thessaly assistant professor, and ECR expert, Pascahalis Arvanitidis, does not believe there will be any imminent changes on the political front:

“Even if there are elections and another party takes over, there will be no real changes in the policies followed and the commitments the country has undertaken.”

Neither is an exit from the euro zone on the cards.

“Both this government and all other political parties with a strong electoral base are committed to Greece's participation in the euro zone,” he says.

It should not be forgotten that Greece remains a high-risk option, but with economic growth, presumed debt relief, and the political will to reform, a corner does seem to have been turned.