Greece: Risk Assessment
Country Risk Rating
Business Climate Rating
- Support from the international financial community and possibility of debt relief
- World leader in maritime transport
- Tourist destination
- Very high level of public debt
- Very poor quality of bank portfolio
- Weak public institutions, strong tax evasion
- Limited industrial base, low-technology exports (food, chemicals, metals, refined oil)
- Social tensions fueled by fiscal austerity and mass unemployment
Tentative Recovery in Growth and Gradual Consolidation of the Banking System
Activity resumed after several years of recession. Household and business confidence strengthened during the year, especially with the agreement reached in June 2017 with international creditors.
The recovery is set to be more marked in 2018. Household consumption is expected to strengthen thanks to improvements in the labor market. The unemployment rate is set to gradually drop to 20%, but wage growth will remain weak. Gross fixed capital formation should improve as a result of confidence building and better financing conditions. This recovery in investment could however be limited by the risk that still weighs on the banking system. Access to bank financing has increased, but the high level of bad loans continues to limit its contribution to economic activity. The question of bad debts is all the more crucial as the ECB, after rejecting the IMF’s request for a new asset quality review, has postponed the date of its stress tests to the first half of 2018. Greek banks were well re-capitalized in December 2015, but the quality of their assets remains uncertain. Under the impetus of the Greek central bank, major banking institutions will be forced to accelerate the cleaning up of their balance sheet. The gradual stabilizing of the banking system should favor a more sustained recovery of bank deposits, the growth of which has remained slow (+7% in 2017). The normalization of the financial situation should, moreover, favor the gradual lifting of the capital control whose measures have been lightened for companies, but remain restrictive for households.
A Primary Surplus in Line with its Objectives, but a Very Heavy Debt
The fiscal consolidation started in 2015, as part of the third financial assistance program for Greece, should continue under the supervision of the European Stability Mechanism (ESM). The program, which will end on 20 August 2018, has made EUR 86 billion available in exchange for significant tax and economic reforms, avoiding the country’s payment default and the bankruptcy of the banking system. Since 2015, parliament has approved a number of reforms, the application of which will run until 2019, the most important being the controversial pension reform, the direct and indirect taxation overhaul (reform of VAT, anti-tax evasion rules, broadening of the tax base). The objective is, ultimately, to reach a primary surplus of 3.5% as of 2018 against 1.75% set in 2017. The fragile recovery and significant reduction in public spending resulted in a primary surplus of 2.1%, above the ESM target. In addition, in September 2017 the European Union (EU) symbolically announced the closure of the excessive deficit procedure opened since 2009. The 2018 budget plans to increase the primary surplus to 3.75% thanks to a stronger economic recovery, but the Greek government’s estimates are based on an optimistic scenario. The IMF’s primary surplus forecast is more pessimistic. The international institution agreed in principle in July 2017, has an assistance program of EUR 1.6 billion, contingent upon European lenders participating in a debt relief scheme. The views of the IMF and European creditors differ on the sustainability of Greek debt, which is close to 179% of GDP. The option of debt relief in the form of reprofiling European loans via the ESM has been discussed without a final agreement between the different parties (IMF ECB, COM, ESM and the Greek Government). The validation of the second valuation review also allowed Greece to return to international markets with a bond issue of EUR 3 billion over five years at a rate between 4.875% and 4.75%. In 2018, the government intends to repeat the experiment and will proceed with several issues of Greek treasury bills to lay the groundwork for the mandatory refinancing of the country on the markets after the end of the assistance program, while rating agencies have positively re-evaluated Greece’s sovereign rating.
The current account is expected to remain slightly in surplus in 2018. Tourism revenue and the export trend will more than offset the increase in the energy bill.
Alexis Tsipras: Between Austerity and Waning Government Popularity
Since the parliamentary elections of September 2015, the Syriza radical left coalition government led by Alexis Tsipras has been leading the country. Founded on a weak coalition with nationalists, the government, revamped in 2016 and under pressure from international donors, had to implement an austerity policy that is gradually reducing its popularity among voters. The gamble seems to have been a successful one, however, as the country prepares for the end of the third European financial assistance program in 2018. Despite some redistributive measures made possible by the primary surpluses generated in 2016 and 2017 (EUR 617 million in measures aimed at the most disadvantaged households in 2017 and EUR 1.4 billion in 2017), Syriza has secured second place in the polls since early 2016 after the New Democracy party, which is the main opposition. While the reconfiguration of the political chessboard is taking shape for the 2019 legislative elections, early elections are not excluded.