Greece's economy has made an impressive comeback, with its government debt being elevated from junk status to investment-grade by both Standard & Poor's and Fitch Ratings. This positive change is remarkable considering Greece's history of economic challenges, including massive overspending, overtaxation, and overregulation. The country's finances were also marred by scandalous abuses, leading to a severe economic downturn. However, since the new conservative government took over, Athens has engineered an astonishing turnaround, becoming a standout in today's dreary economic environment.
According to a recent IMF report, Greece's economic outlook has notably improved. The report states that Greece's real GDP has surpassed its pre-pandemic trend level, and the public debt-to-GDP ratio has decreased below its pre-pandemic level. The banking system has also shown resilience with improving balance sheets. However, the report also highlights challenges such as macro-financial issues, persistent core inflation, rising real estate prices, and structural imbalances. To achieve higher and greener growth, the IMF recommends a policy mix that includes fiscal consolidation, strengthening financial system resilience, and accelerating pro-growth reforms. Despite natural disasters, Greece's economy has maintained robust momentum, with solid growth in real GDP and declining unemployment. Inflation has decelerated but remains high, and residential real estate prices have increased. The IMF projects robust growth for Greece in the coming years before moderating towards the medium term, while emphasizing the need to monitor and manage risks associated with interest rates, liquidity, funding, and credit exposures.
Fitch has now joined S&P Global Ratings in upgrading Greece's credit rating to investment grade. Fitch expects Greece's general government debt/GDP to continue decreasing due to solid nominal growth, budget over-execution, and a favorable debt-servicing structure. The agency predicts Greece's debt as a proportion of economic outlook to fall to 160.8 percent this year and 141.2 percent by 2027. Greece underwent eight years of austerity under three international bailouts, reducing GDP by a quarter and causing unemployment to soar. The credit rating upgrade is seen as an important national success.
S&P Global Ratings has raised Greece's sovereign credit outlook to positive from stable, just months after the country regained investment grade status. The positive outlook reflects the expectation that the tight fiscal regime will continue to reduce the government debt ratio, while growth is expected to outperform that of Greece's euro zone peers. Greece's rating was affirmed at BBB-. The government aims to increase the budget's primary balance to 2.1% of GDP in 2024 from 1.1% in 2023 and sees the debt ratio declining to 152.3% of GDP in 2024 from 206% in 2020. Greece has also made progress with its divestment plan from the country's lenders and banks are ready to pay dividends for the first time since 2008.
Further upside for Greece's credit rating hinges on robust nominal growth, deeper fiscal consolidation, more reform of the banks, and structural reform compensating for years of public and private under-investment. Support for Greece from European institutions, improving economic fundamentals, and a strengthened banking system drove Scope Ratings' decision to upgrade Greece's credit rating to investment-grade in August of last year. Solid nominal economic growth and continued fiscal consolidation are necessary for ensuring a significant reduction of government debt-to-GDP. Further progress in strengthening the Greek banking system is also essential. Greek banks' financial fundamentals have significantly improved over the past years, and profitability has recently rebounded. The government needs to oversee further structural improvements in the economy, such as curtailing external-sector risks, assuring higher rates of medium-run economic growth, and strengthening macroeconomic sustainability. Regaining investment-grade status has contributed to the narrowing of yield spreads on 10-year Greek government bonds. Further progress on reforms to strengthen the structure of the economy and enhance macroeconomic sustainability would contribute to improving Greece's appeal for foreign and domestic investors.
The European Commission considers the period between 2025 and 2034 to be high-risk and critical for the sustainability of the Greek debt. Greece and eight other countries are assessed as facing high fiscal sustainability risks in the medium term. In the short term, the risks of fiscal sustainability in all EU countries are low. The debt ratio is projected to decline slightly until 2026, after which a gradual increase in debt-aging costs and interest spending will reverse the trend. The Debt Monitor 2023 report and the debt sustainability analysis prepared by the Commission for the countries of the European Union also take into account the cost of the aging population. If Greece overcomes the high-risk period, it will become a low-risk country on the debt front until 2070.
Greece is a country where reforms can be made to improve the quality of democracy, strengthen the economy, and change the lives of Greeks for the better. Many reforms have already been made in the past 10 years, stabilizing the economy, banking system, insurance system, tax collection process, and competitiveness. The Greek people also express their desire for reforms. The timing is ideal. Greece received loans totaling 289 billion euros for the refinancing of its public debt, creating a sense of security for many years. The sustainability of the public debt depends on maintaining a primary surplus of around 2% of GDP and implementing certain basic reforms. The lack of a large enough labor force is a problem that needs to be addressed quickly. Greece aims to reduce its public debt to 60% of GDP in about 40 years. Democracy in Greece is not in danger but needs improvement through the strengthening of institutions. Education, health, and the environment are the main areas that need reform. Greece is relatively prosperous based on the United Nations Human Development Index. The biggest reform priority is education.
French markets have found some relief after the first round of its latest election, with stocks recovering somewhat and bond yields falling after reaching a 12-year high. But no matter which side wins in France, the market is afraid that an increase in debt-to-GDP ratio could be the common denominator. Greece's sovereign debt crisis after the global 2008 implosion was characterized by an excessively high debt-to-GDP ratio, budget deficits, low growth, and an over-reliance on revenues from the tourism industry. France's debt-to-GDP skyrocketed during COVID-19, and after etching downwards, it's now trending back up and is expected to exceed COVID levels within a few years. The French economy is unsure of how to react to the policy promises of the left and the right, so whispers of a potential debt crisis have far from stopped just because volatile French markets are experiencing a momentary breath of relief. Eyes are on the yield spread between France and Germany. Yields for 'safe haven' have become the Eurozone benchmark, so the difference between German yields and those of other countries has become an indicator of the relative risk tolerance for investors in European government debt. Both France and Belgium were once considered low-risk 'core' nations among European economies as the problem of overspending is recognized across what were once regarded as economically stable countries. Meanwhile, the US has many of the same problems — raging deficits, low growth, rising debt-to-GDP ratio, and high inflation. The US also has more tricks to kick the can down the road, but few options for fixing the problem. S&P Global Ratings warns that the United States, France, and other major economies are unlikely to halt the rise in their debt levels in the next few years. S&P estimates that the primary balance would have to improve by more than 2% of GDP cumulatively for the debt to stabilize in the US, Italy, and France, which is unlikely to happen over the next three years. The agency believes that only a sharp deterioration of borrowing conditions could persuade G7 governments to implement more resolute budgetary consolidation at the present stage in their electoral cycles.
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