The European Central Bank is perhaps one of Greece’s most powerful allies in this crisis, but the early conclusion of the PEPP program should not endanger Greek bonds, as until then the sustainability of public finances The country will have improved further, Fitch Ratings analysts told Kathimerini.
“It is true that we expect Greece’s public debt to GDP to exceed 210% in 2020 – roughly three and a half times our estimate of the BB median, following the severe shock to the economy and public finances. of the Covid-19 pandemic. And we know that the public debt will be high for a long time. We would be concerned if the public debt ratio did not retreat from this peak – and we highlight this as a factor that could lead to negative rating action, ”said Alex Muscatelli, sovereign group director at Fitch.
“At the same time, we recognize that there are mitigating factors that support debt sustainability. Some of these factors are domestic in origin: Greece’s liquid asset cushion is substantial (around 20% of expected GDP) and can adapt to unexpected increases in spending; the concessional nature of the vast majority of Greek public debt and the moderate amortization schedule mean that debt servicing costs are low. We estimate that over the next two years, the overall debt service (amortizations, interest payments and primary deficits) will be broadly in line with our cash buffer assumption. In addition, the average maturity of Greek debt (around 20 years) is among the longest of any Fitch-rated sovereign, reducing the risk of rising interest rates. These are only considerations specific to Greece, then there is the support of the ECB, ”he argues.
Muscatelli adds that the Greek budget balance should convince investors in the post-PEPP era: “The inclusion of Greek government bonds in the PEPP is an important additional source of funding flexibility. Based on Greece’s capital key to the ECB, this would allow the Eurosystem to buy up to € 37 billion of bonds in the secondary market, and ECB data suggests that only the about half of that amount has been used. There may be risks for marginal funding costs at the end of the program, but we must remember that while the net purchases may end early next year, the ECB has indicated that funds from bonds maturities will be reinvested at least until the end of 2023. There is therefore a small risk for the moment of an abrupt end to ECB purchases. Our projections suggest that by 2022 or 2023 the Greek budget will be close to a primary balance and this would boost confidence in the sustainability of public finances. “
He does not rule out an improvement in the rating or the outlook in the next two years: “Greece’s rating is on a stable outlook, which means that we think it is likely that the rating will not change on a horizon of one to two years. . That said, if the public debt ratio returns to a firm downward trajectory after the coronavirus shock dissipates, especially through improving economic growth dynamics and fiscal consolidation, these could be triggers. a positive change in outlook or rating, ”Muscatelli told Kathimerini.
The risks to the economy come from the weak recovery in tourism and any delay in the absorption of European funds, he warns.
Delays in the roll-out of vaccination, not only in Greece but also among its major trading partners, would slow the rebound of the tourism sector. This is a major risk to the short-term economic recovery, we saw in 2020 how the severely shortened tourist season prevented economic activity from rebounding in the third quarter of the year as it did in others. European economies. Our colleagues on the business side estimate that it will take some time for the tourism sector to recover, and that occupancy rates in Europe for example in 2023 will be still a little lower than in 2019 (around 8%). For our part, we estimate that the current account deficit has widened considerably due to low tourist arrivals in 2020, to 7.2% of GDP, and that it will only gradually decrease to 5.7% in 2022. Another risk, more in the medium term, is a low rate of absorption of funds from the EU stimulus package. “
Phasing out of moratoria
Fitch officials also noted that while the pandemic increases the stock of non-performing exposures of Greek banks, the NPE index is also expected to decline this year, thanks to securitizations, although the challenges for the sector remain considerable.
“The use of moratoriums and regulatory forbearance contained the deterioration in asset quality in 2020 (in fact, the sector’s impaired loan ratio fell to 36% from 41% in 2020). In addition, as you know, the expansionary fiscal policy and the implementation of support schemes by the Greek government, including payment subsidies such as “Gefyra” and guarantees for some loans, have supported and supported the situation. financial institutions, ”explains Pau Labro, director of the agency’s financial institutions.
“We expect an increase in the flow of bad loans given the phasing out of the moratoria. Similar to other countries with little recourse to government guaranteed loans, recourse to moratoria in Greece is relatively high, accounting for 12% of total bank loans on average. The moratorium has been partially extended following the second lockdown, but we estimate that most of the moratoriums have either expired at the end of 2020 or will expire in early 2021. We expect Greek banks to try to mitigate the impact the expiration of the moratoriums on loans. by using state support schemes (which should be extended in 2021) and by offering private restructurings, such as progressive repayment of monthly installments. “
“In our baseline scenario, we expect the sector’s bad loan ratio to decline to around 30% by the end of 2021, compared to 36% if banks execute the securitizations scheduled for 2021, using the asset protection system,” despite the news the bad loan inflows, which would contribute about six percentage points to the bad loan ratio. For our estimates, we include the large securitizations planned by NBG, Alpha and Piraeus for 2021 with a gross value of around 25 billion euros. These transactions are conditioned on the materialization of the economic recovery, the appetite of investors and the ultimate impact on the capitalization of banks, ”explains Labro.
“Of course we live in a very changing environment with obvious downside risks, but we still feel that the credit profile of Greek banks could improve (again from a limited impact position on capital ) and contain new inflows of impaired loans resulting from the moratoriums. Last June, for example, Fitch upgraded Eurobank to ‘B-‘ with a negative outlook despite the environment as the bank managed to complete a significant securitization of bad loans, reducing its bad loan ratio at around 15%, which is well below the domestic sector. Extraordinary supportive measures taken by the authorities, including government support or industry-wide NPL recovery programs, or the new insolvency framework could also benefit banks’ credit profile. “
Labro further views the central bank’s proposal for a bad bank positively: “The Bank of Greece’s proposal to set up an asset management company could indeed be positive for the outlook for banks’ asset quality and would also improve the quality of bank capital by reducing the high proportion of deferred tax credits. However, given the current uncertainty, we do not take into account any impact of this pattern in our projections.
Fitch also expects corporate bond issuance to take off this year, replied Alex Griffiths, head of corporate rating for the agency’s EMEA region, Alex Griffiths to Kathimerini. see more international issues from Greek companies in 2021, reflecting strong market conditions and the fact that companies will move from short-term “emergency” financing, which has often been provided by banks, to more older and more diverse. But there will always be a trade-off for bigger companies on price, which will be a very important consideration, ”he said.