Greece's Investment Grade Prospects & Risks
The recent news of receiving the investment grade from the rating agencies and specifically from S&P (Standard and Poor's Global Ratings), flooded the domestic and international press and triggered a crescendo of public arguments and commentary from government officials that focused on the positive aspects of the upgrade, while the main opposition contradicted them, stressing the microeconomics of everyday life for the average citizen - a harsh political response to the current government euphoria.
The benefits of the investment grade will logically mature in 2024 when new funding will flow into the Greek government from the bond offers. Financial liquidity will be positively affected, with banks increasing credit lines and businesses receiving loans on more favorable financing terms.
Are there countervailing risks & traps alongside the objective and positive signs of the Greek economy, which has succeeded and survived through a difficult decade of fiscal derailment and arduous recovery, in its quest to regain the coveted investment grade?
Writing this article while a new war has begun in our neighborhood (Middle East), with analysts predicting negative developments in the price of oil and a new revaluation in the cost of energy, and gold's price climbing to new historic heights as a safe haven during global volatility, let's consider the following risks that the government should take into serious consideration.
Greece retains a history of high levels of public debt. While these have improved with the end of the pandemic, great attention is needed so that the debt sustainability succeeds until the deadline of the grace period (approximately 2032) for the interest payments. The country's economy is particularly sensitive and prone to volatile external factors and macroeconomic fluctuations which they can at any time affect economic stability leading to recession. As happened with the global financial crisis in the past, accordingly, Greece may be affected by the current geopolitical instability in its region, which could reduce tourism, affect foreign direct investment and value-added exports; alongside a possible stagflation at the European level, continuously galloping precision and reduction of internal demand thus weakening consumption for the Greek citizens.
The results of the recent municipal elections sent a strong message to the government about the problems facing the country with the rapid increase of prices for products and services, the climate change that turned out fatal as we bitterly saw in critical geographic areas in Greece. The next years, any political instability can prove fatal to economic progress. Changes in persons, politics, historically affect the structural reforms and the economic recovery prospects. If the agreed reforms are delayed, postponing changes in important strategic areas such as health, economy, justice, safety, environment, etc. the next round of investment grade recovery may postponed.
The European Union will continue to support its member states as far as it can. New funds will be directed to Greece as long as it retains a responsible fiscal discipline and keeps up with the annual goals and milestones set by the European Central Bank, in order to maintain the primary surplus which directly serves the sustainability of the overall Greek public debt, without degrading the living standard of citizens.
The geopolitical situation and crisis in the Middle East, if it lasts for a long time, carries very serious risks and is likely to cause damage to tourism, the flagship of the country's GDP for growth and jobs. The war also brings issues of regional and internal security. Let's not forget, the aging population, a problem not only faced by Greece in Europe, the notorious brain-drain with the movement of young people and scientists abroad, augmenting the reduction of the productive base of our society and shrinking workforce.
A new round of central banks interest rate hikes is also not ruled out, something that would drag away government bond yields, raising borrowing costs and damaging debt servicing. If the world economy eventually goes into recession, the credit rating of Greece by the 3 big rating agnecies (Moody's, Fitch, S&P), will not proceed with a new upgrade.
The Government must seriously consider the aforementioned dangers and risks, do not rest on the laurels of the first investment upgrade. Any negative developments in our region or globally, will have a significant negative impact on maintaining dynamic growth. Finally, let's not forget that before the three bail outs and the debt crisis, our Greece's official credit rating was several levels above the current investment level.
-Efstathios Kassios (Writer, Economist, Business Consultant, EU Project Management)
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