Greece: Risk Assessment

Country Rating¹

Rating: C

Business Climate Rating¹

Rating: A3

Risk Assessment²

High risk of Greek default
The financial crisis exposed the unsustainable nature of the growth regime founded on a bubble in public and private debt. The doubts of investors about the payment capacity of the Greek government necessitated implementation of an initial €110 billion rescue plan in May 2010 in conjunction with drastic fiscal measures and structural reforms focused on the pension system, the job market, and an overhaul of the tax system intended to improve collection effectiveness and reduce the influence of the grey market. However, this plan is not enough as the country is not in a position to return to markets, as envisaged, in 2012. The worsening economic, financial, and social situation has pushed long bond rates to record levels and creditors are increasingly sceptical, while European governments are still struggling to implement the measures agreed at the European summit of 21 July 2011, when a new Greece bailout plan was set at €160 billion, with private sector help involving, at this stage, a 21% haircut on Greek sovereign debt securities. Relations are strained between Greece and its international funding partners, critical of the time taken to implement fiscal measures and privatizations. The release of the sixth tranche of the loan granted to Greece in 2010 by the IMF and the EU has been postponed. In addition, the recession, worse than expected, further increases the budget deficit and public debt is threatening to spin out of control. Against this background, a larger Greek default is expected. Even if it is an orderly default, banks and Greek investors will have little resistance.

Lengthening recession
The decline in economic activity increased further in 2010 under the combined effect of low domestic, foreign and public demand. The recession continues in 2011 with GDP contraction reaching 7.3% year on year in the second quarter, after contracting 8.1% in the first quarter and 8.8% in the fourth quarter of 2010. Private consumption and investment continue to fall. Exports have declined slightly since the start of the year but foreign trade is still contributing positively to the economy due to the sharp drop in imports. Consumption is expected to shrink by approximately 7% in 2011, affected by the fall in real household incomes, higher taxes, and rising unemployment. Meanwhile, the drop in business confidence, higher corporation tax and tighter bank lending policies, themselves faced with a lack of liquidity and a rise in bad debts, will bring about a double-digit investment contraction for the third straight year. The EU economic slowdown (over 60% of sales) will affect exports. The increasing technology content of Greek exports constitutes a competitive advantage. But the proportion of manufactured products has remained moderate with the country also a supplier of food and chemical products. The large tourist sector is likely to benefit, meanwhile, from the deteriorating political situation in North Africa. Overall, the current account deficit is likely to continue to contract (expected to represent 8% of GDP in 2011) due chiefly to weak imports.

Companies finding it difficult to obtain financing
Greek companies have been affected by the tight economic and financial conditions, the reduction in orders from the public sector, and higher taxes. Late payments were significantly higher in the first half of 2011. The construction and retail sectors in particular have been weakened by the deterioration of domestic demand. Sea transport remains an economic strongpoint. Companies are bracing themselves for a shortage of finance. Greek banks are indeed skittish on lending to either households or businesses - all the more so where they had been excessively generous in the euphoric economic period. Annual growth in lending to business peaked at 25% in October 2008. This shrank to 7% in the first half of 2011.

Strengths

• Support of the international financial community
• World leading ship owner
• Highly attractive tourist destination

Weaknesses

• Structural weakness of public finances and poor tax collection
• Lack of transparency of statistical data
• Continuing social tension due to implementation of an austerity budget
• Business environment undermined by bureaucracy