MNI INTERVIEW: ECB Decision To Impact Greek Upgrade Hopes

Greece's chances of a credit-rating upgrade would improve if the European Central Bank continues buying its government bonds beyond the expected conclusion of its pandemic emergency purchase programme next March, but this is not guaranteed, Scope Ratings lead analyst Dennis Shen told MNI.

After the EUR1.85 trillion PEPP ends net purchases, a waiver on a rule barring sub-investment grade bonds from the ECB's regular QE would be needed in order for Greek bonds to be included in its Asset Purchase Programme, something which Shen noted was not a certainty. Greece would also benefit from an extension beyond June 2022 of a waiver allowing its bonds to be accepted as collateral for Eurosystem transactions.

"Greece certainly thinks it has a shot at having the ECB buying Greek bonds even as PEPP ends," Shen said in an interview. "But under the – I think – still outstanding possibility that Covid-19 programmes and waivers are wound down by end-next year, absent additional recourse or exceptional considerations to ensure Greece bonds stay eligible, that's certainly a main risk on the rating horizon."

"Were Greek debt to be included in APP or an alternative post-Covid facility] it would have a [positive] impact on the credit rating outlook."

Bank of Greece governor Yannis Stournaras has expressed confidence in recent weeks that the ECB will not withdraw support, while highlighting projected GDP growth rates of 7% and 5% over the next two years. MNI sources have separately claimed that a "positive surprise" may be in store towards the end of next summer for the country's debt rating - which in September Scope returned to BB+, one notch under investment grade level. While Scope is still not included in the ECB's list of credit rating agencies for considering debt eligibility, an upgrade would potentially resolve a contentious issue for policymakers.

Whatever the immediate future for bond-buying arrangements, Greece will continue to benefit from innovations introduced by the ECB during the crisis, such as flexible purchases, which are likely to be reactivated during future crisis periods, Shen said. But the country may struggle to outgrow its debt even with substantial support from funds under the EUR800 billion-plus NextGenerationEU programme, he added.

FALLING POPULATION

Credit bottlenecks, a declining population and the fact the overall stock of debt is likely to change little - or even increase in the event of another downturn - all pose challenges, although continued improvements in the underlying composition of Greece's liabilities, including drawdowns of IMF loans, may positively affect ratings with time, Shen said.

Despite progress in reducing non-performing loans, levels remain high and three out of four large Greek banks performed poorly in the latest European Banking Authority stress test, he said.

"One of the main hindrances for us, and for other credit rating agencies in the past, has been Greece's limited growth potential, which even now we are estimating at 1% over the medium run," Shen said. Labour market rules and tax collection require continued improvement if Greece is to put itself on a more sustainable footing, he added..

So far, Scope has been more positive on Greece than the major ratings agencies used by the ECB to assess sovereign credit-worthiness, though DBRS followed its latest move with an upgrade to BB one week later.

"It appears possible that S&P may upgrade to BB+, one notch under investment grade, over the forthcoming period," Shen said. "In our BB+ ratings, we included a -1 notch rating adjustment on the basis of outstanding banking-system risks. Were such banking system risks to continue to be alleviated, obviously that would be credit positive. But such changes require time, as does addressing other credit ratings constraints such as structural economic limitations, elevated government debt or modest economic potential."

Scope will officially apply for ECAF status, which would allow it to join the ECB-approved club, at the end of this year. The ECB declined to comment.