The four reasons that “show” an upgrade of Greece…

The four reasons that “show” an upgrade of Greece…
The four reasons that “show” an upgrade of Greece…

Her Eleftherias Kourtalis

Société Générale considers the upgrade of Greece today by Moody’s possible for four reasons, however, it estimates that the Greek government’s large support package for the energy crisis may be an obstacle for the house.

Moody’s rates Greece’s credit rating with “Ba3” and a stable outlook (three notches below investment grade), Fitch with “BB” and a positive outlook (two notches below investment grade), while S&P at “BB+ “, and DBRS at “BB high”, with a stable outlook and just one breath away from investment grade. Although Moody’s gives a stable outlook and this does not “advocate” for an upgrade today, the French bank does not rule out a positive surprise.

As Société Générale notes, the trend in ratings of eurozone countries by houses has been mixed since the Russian invasion of Ukraine: ratings for Portugal, Greece and Ireland have been upgraded, while positive trends in ratings for Italy and Austria have stopped.

In her view we could see positive developments in Moody’s rating of Greece today for several reasons: (1) Moody’s last rating was two years ago, (2) the current Ba3 rating is still low compared to the ratings of the remaining three major houses, (3) the country’s fundamentals are still strong, and (4) structural reforms, the main driver of the series of upgrades in recent years, are expected to continue.

However, as the French bank points out, the large fiscal package to fight inflation announced and implemented by the Greek government could burden the country’s deficit, which is likely to affect the rating agency.

The upgrade of Greece will not be a surprise for SocGen, however, just as the upgrade of Portugal by S&P last week was not, as from the beginning of 2022 the French bank had pointed out that positive developments are expected in the ratings of Greece, Portugal and Ireland.

SocGen points out, however, that the interest-to-income ratio plays an increasingly important role in country evaluations, which is expected to increase in all euro zone countries, as estimated by its economists.

While it may make sense to look at the debt-to-GDP ratio as the overall picture of European countries’ debt sustainability, SocGen’s country scoring model provides a different aspect.

The optimal weighting in this model shows that the level of debt has never been very relevant for markets, while debt affordability, measured by the ratio of interest payments to income, has become more important.

Economists at the French bank see weak debt affordability in all European countries. The debt-to-GDP ratio generally assesses a country’s ability to repay all of its debt, as government revenue is usually a fixed percentage of its GDP. For example, if a country’s revenue is about 50% of its GDP (typical for a European country), then a debt-to-GDP ratio of 150% means that the country needs to use three years’ worth of revenue to pay off all of its debt.

Most European countries borrowed a lot of money during the COVID crisis at very low interest rates due to the ECB’s accommodative monetary policy, meaning debt-to-GDP ratios have risen. However, since the cost of this debt is very low, governments only have to spend a small portion of their revenues to pay the interest.

Therefore, debt affordability, assessed by the ratio of interest payments to income, has become more important.

Economists at SocGen now see this indicator rising for all European countries, but the increase will be limited for Ireland. Italy’s ratio of interest payments to income will continue to be the highest until 2026, while Greece – as shown in the graph below – will be close to it.

In any case, 2022 is likely to be the tipping point where debt affordability starts to deteriorate for all European sovereigns, SocGen concludes, which will play an important role in the trajectory of their ratings and how they are evaluated by markets. .

The article is in Greek

Tags: reasons show upgrade Greece ..

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