Improved liquidity position considerably diminished the threat of a renewed liquidity crisis in the short to medium term

Greece’s economic and liquidity position progressively improved since June 2015, when – facing a bank run – the country had to impose capital controls, and a lot of political will from European partners barely prevented the country’s exit from the eurozone by providing it with a bailout package (under the extra supervision of the IMF). Since 2017, positive economic growth has resumed on the back of the return of confidence due to a good track record on the bailout programme, solid growth in the euro area and thriving touristic seasons. The international rescue programme ended in August 2018 with the authorities, by then, relying exclusively on international capital markets for its financing. The country had additionally benefitted in June 2018 from a further debt relief from European partners on its long-term public debt, including the provision of a cash buffer allowing (re)financing risks to be totally excluded up to the end of 2019 and significantly reduced until the end of 2022. In the meanwhile, banks have been recapitalised and deposit accounts have been partially replenished, allowing the liquidity of the banking sector to improve and all remaining capital controls (including those on cross-border payments in the framework of international trade) to be fully lifted as from 1 September this year. Those positive elements have considerably diminished the threat of a renewed liquidity crisis in the short to medium term.

Legacies are still weighing on the development of Greece’s full growth potential

In particular, the balance sheets of the banking sector remain weak and affected by a high level of non-performing loans (NPLs). NPLs are reported to represent more than 40% of total loans at Q1 2019 (while the euro area average is 3.7%). Since NPLs represent an obstacle to economic upturn and weigh on credit growth, the legislative framework has been adapted to provide tools to clean up bank balance sheets but those need to be effectively applied by banks. Initiatives have also been recently proposed by the Bank of Greece and Ministry of Finance in order to reduce them.

But one of Greece’s main vulnerabilities remains its extremely high level of general government debt, in spite of the significant fiscal consolidation and successive debt relief programmes from European partners. Even if there has been overachievement of the (primary) fiscal surplus targets in the last years, the public debt is still forecast to stand at 174% of GDP in 2019. Medium-term debt trends look manageable but only assuming that fiscal discipline is maintained, implying no policy reversals due to reform fatigue, and a regular capital market access, escaping any contagion effect associated with a potential crisis in other (European) countries. However, downside risks on the fiscal side are well present, fuelled by the announced tax cuts by the centre-right New Democracy party at the helm of the government since July 2019 and the Council of State pending final rulings over the constitutionality of earlier pension cuts. Demography is not helping as years of crisis have led to an exodus of highly skilled workforce. Additionally, the population is ageing, which will further stress the social security finances sustainability in the long term. However, on a positive note, the country has launched this month a process of approval of an early repayment of a significant part of the remaining debt due to the IMF (with a high interest rate), in order to reduce its debt service cost.

The business environment is negatively affected by the slowdown of world trade and rising protectionism is impeding exports. This partly justifies Credendo’s high business environment risk category rating, placing Greece in category C (on an A-to-C scale). Yet, the improved liquidity position and lifting of capital controls on international payments allowed Credendo to upgrade this month its category for the short-term political risk from category 4 to 3 (on a 1-to-7 scale).

Analyst: Florence Thiéry – f.thiery@credendo.com