Greece: Risk Assessment
Country Risk Rating
Business Climate Rating
- Abundant European financial support, both fiscal and monetary
- World leader in maritime transport
- Competent pandemic management
- Rapidly-improving business climate
- Very high public debt
- Very poor quality bank portfolio; high level of non-performing loans
- Cumbersome bureaucracy and judicial system
- Poorly diversified industry, overwhelming tourism dependence
- Increasing security concerns vis-à-vis Turkey
Tourism-induced bust, investment-led rebound
As one of the most tourism-dependent economies in Europe (20% of GDP), Greece’s road to recovery will be particularly challenging. Tourism revenues are estimated to have contracted by 75% in 2020. In the event of a speedy vaccine rollout across Europe, the sector could be approaching normality in H2 2021. However, the first half of the year will remain tumultuous even in an optimistic scenario, due to ongoing waves of lockdown and reopening in Greece and its neighbors. Exports of goods (refined oil, pharmaceuticals, metals, food products) will lead to the recovery of external demand in 2021 with the rebound of maritime trade, but total net exports will continue to have a negative contribution. Private consumption (69% of GDP) has benefited from emergency measures, restraining the 2020 contraction to 6%. While the furlough scheme has kept unemployment at bay, it is nonetheless expected to peak at slightly under 20% (vs a pre-pandemic level of 17%) as corporate insolvencies start materializing. Investment (11% of GDP), bolstered both by business-friendly reforms and by an outpour of European funds, will spearhead the recovery. Greece will be one of the main beneficiaries of the Next Generation EU recovery fund and set to receive EUR 33 billion (18% of GDP) over the next 7 years, spurring 19% investment growth in 2021. If carefully executed, these funds will be used to strengthen the electricity grid (particularly in the islands), build 5G and electric car infrastructure, digitalization ventures including the EUR 870 billion Ultrafast Broadband project, education, and worker retraining programs, among other projects set to boost potential output.
European support mitigates the sovereign risk, but banks remain an Achilles’ heel
The pandemic led to 5% of GDP in additional spending and 2.5% in foregone revenues in 2020. Support has come overwhelmingly through on-budget spending (as opposed to off-budget measures like loan guarantees). Notable measures include a refundable advance payment to firms (2% of GDP, refunding starts in 2022), wage allowances and coverage of social security contributions (1.5% of GDP), reduction of advance income tax payment (0.7% of GDP), the furlough scheme, extension of unemployment benefits, and increased healthcare spending. Tax cuts, employment subsidies and the refundable advance payment will continue into 2021. The relatively small scale of public guarantees (1.5% of GDP) is consistent with the state’s already oversized exposure to the banking sector, which is set to increase further with the nationalization of Piraeus Bank. Existing EU grants (2.5% of GDP) have been frontloaded in order to cover part of the financing gap, thus cushioning the impact on the 2020 deficit. Nevertheless, expenditure is set to grow by 11% in 2020 and moderate by 6% in 2021, while revenues will drop by 6% before rebounding by 5%. Public debt will surpass the 200% of GDP threshold, but sovereign risk is mitigated by creditor structure (80% official) and by EU/ECB stimuli. Notably, the ECB has included Greek bonds in its QE program, bringing borrowing costs to all-time lows. Furthermore, Greece will be the Eurozone country that benefits the most from the EU Next Generation recovery fund (18% of GDP over 2021-2027). The banking sector still bears the scars of the previous crisis (36% non-performing loan ratio). The Hercules bad bank scheme will reduce this stock by half, but the pandemic is expected to increase it by 8%. The possible creation of a European bad bank is an upside risk. The external deficit, driven by the structural goods trade deficit (12% of GDP), is predominantly financed by Eurosystem liquidity flows (TARGET 2 balances) and FDI.
A competent executive keeps the reform agenda on track, tensions escalate with Turkey
Commanding an outright majority in Parliament (158 out of 300 seats), the center-right New Democracy administration headed by Prime Minister Kyriakos Mitsotakis has had a positive year in power, keeping a comfortable lead over opposition leader Syriza (45% of voting intention vs. 27%). The pandemic response was reactive and the impetus for business-friendly reforms has not been stymied. The overhaul of the insolvency legislation has strengthened bankruptcy prevention, streamlined restructuring, and softened conditions on defaulting debtors. Other reforms have strengthened independence and transparency in public sector recruiting, simplified investment licensing, and moved forward the energy sector privatization and bureaucratic digitalization. Future structural reform projects involve abolishing outdated labor market practices, a pension reform, speeding up judicial processes, and streamlining urban planning. The main geopolitical challenge will be avoiding an outright conflict with Turkey while asserting energy interests. A long-standing dispute over the maritime claims awarded by the Greek archipelago has intensified after the discovery of hydrocarbon reserves. The risk of military engagement became dangerously high over the summer of 2020 after a naval collision. Despite an EU-mediated de-escalation, both parties seem fundamentally unwilling to back down in the long run.