Greece: Risk Assessment
Country Risk Rating
|C||A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high.|
Business Climate Rating
|A3||The business environment is relatively good. Although not always available, corporate financial information is usually reliable. Debt collection and the institutional framework may have some shortcomings. Intercompany transactions may run into occasional difficulties in the otherwise secure environments rated A3.|
Economic activity is expected to recover in the second half of 2016
After having been hit again by the recession in 2015, due to uncertainties generated by Syriza's rise to power and the introduction of capital controls, in the middle of the year, the country should gradually return to growth in the second half of 2016 thanks to increased confidence generated by the easing of tensions with the international financial community. The expected completion of the first review of the European Stability Mechanism program following the agreement reached in May 25, 2016 by the euro area and the implementation, in early June, of additional measures, should lead to the resumption of European disbursements and pave the way for debt relief at the end of 2018. Renewed confidence linked to these latest developments should help lift capital controls and encourage investment recovery. Drawings on European loans should, inter alia, allow the government to pay its arrears and thereby re-inject money into the economy.
The unemployment rate should continue to decline slightly in 2016 due to the reforms of recent years and the recovery in economic activity. However, it remains very high (24.4% of the workforce in Q4 2015).
Major reforms have been passed in May 2016
The third bailout package, following those in 2010 and 2012, approved by the Eurogroup in August 2015, involves the provision of 86 billion euros in exchange for the implementation of significant reforms. The Greek parliament has approved a number of these reforms between the summer and the end of 2015, including regulations governing property seizure. In May 2016, it adopted the controversial pension and tax reforms, as well as new austerity measures (indirect tax increases and the creation of a new state privatization fund, an independent public revenue authority and a contingency mechanism designed to cut spending if the country fails to meet fiscal targets). This was also the case, at the beginning of June 2016, after much procrastination, for the additional measures (phasing out of a benefit for pensioners, privatization of an electric operator, lifting of restrictions on selling nonperforming loans guaranteed by the state).
Progress have been achieved on budget but public debt can be brought down to a sustainable path only if it benefit from a substantial relief
The more limited than expected decline in activity, the fiscal adjustment effort made in the second half of 2015 and one-off factors have enabled the country to achieve a slight primary surplus (excluding interest payments and the support to the banking sector) last year, exceeding what had been agreed. However Bank recapitalization, completed by year's end, temporarily increased the total public deficit to over 7% of GDP. Reforms and measures taken in 2016 should generate new savings and ensure that the deficit will remain limited to around 3.6% of GDP this year. With the resumption of financial assistance, payment default by the government should once again be avoided. Moreover, if commitments under the rescue plan are met, Greece should benefit at the end of 2018 from a major debt relief thanks to a reprofiling of the European loans. However, even after restructuring, debt dynamics will remain highly sensitive to economic and fiscal shocks.
Banking sector is convalescing
Banks experienced a severe crisis marked by a lack of access to international capital markets, deposit flights, a long-lasting recession and losses caused by the forced restructuring of Greek sovereign debt in 2012. Banks have been recapitalized and consolidated in 2014 and recapitalized again late 2015. However, their profitability and the quality of their assets have strongly deteriorated (nonperforming loans account for nearly 35% of total loans). Moreover, if the introduction of capital controls helped stem deposit withdrawals, these have not replenished. The situation in the sector should remain weak in 2016 although efforts are undertaken to address the problem of bad loans.
Country's politics continue to be impacted by the financial and economic crisis
Greece has experienced in recent years a strong political instability (five elections and a referendum in seven years), all governments having been torn between donor requirements and the need to prevent a social explosion. The current government, led by the party of the radical left "Syriza", that emerged victorious from new early legislative elections (September 2015), now only has a two-seat majority in Parliament and thus remains fragile. Moreover, the country has found itself in the front line of the migrant crisis.