By Vassilis Kostoulas
The chief credit officer of EMEA at Moody's Corporation, Cοlin Ellis, told "N" this week that a precautionary credit line for Greece after the end of the current bailout program in August 2018 does not mean that the latter was unsuccessfully completed.
Ellis, who spoke a week after Moody's upgraded recession-battered Greece's rating, from Caa2 directly to B3, said one of the reasons behind the somewhat sudden decision is an expectation by the ratings firm that the country will successfully complete the adjustment program, along with "material fiscal and institutional improvements" achieved by the country since 2015.
He added that Moody's considers that the risk of another Greek default or private debt restructuring has "materially declined", while adding that Moody's believes Eurozone creditors will meet past promises and extend more medium-term debt relief - mostly maturity extensions - a prospect that will be judged as a credit positive event.
How is Eurozone's growth prospect developing and what are the challenges for the European economy at this stage?
The European economy is currently enjoying a cyclical upturn which, given that Europe has lagged other economic recoveries, probably has further to run this year and next. However, structural fragilities persist in the euro area; and a key challenge for policymakers will be to push forwards further reforms while growth is positive – fixing the roof while the sun is shining. A key debate here is whether greater risk mutualisation can happen without more risk reduction in certain euro area member states.
What is the forecast for the ECB's quantitative easing program and which countries have so far benefited the most?
We expect the ECB to gradually reduce the pace of its new asset purchases, probably stopping around the turn of the year if the upturn persists. Our analysis suggests that some so-called peripheral countries, such as Ireland and Portugal, have gained more from QE in terms of lower yields than core countries such as France.
What does the recent upgrading of Greece's rating, from Caa2 directly to B3, practically mean? Ιt was a development that sprung on. Indeed, it followed immediately after the last Eurogroup meeting, which did not give the "green light" for the completion of the third review.
The upgrade reflected both material fiscal and institutional improvements achieved by Greece since 2015, and our expectation that Greece will successfully complete its current fiscal programme. Greece also stands to benefit from further debt relief from official-sector creditors. Overall, we judge that the risk of another default or private debt restructuring has now materially declined.
Where does Moody's base the assessment for a "clean exit" for Greece from the program in August 2018? It is worthy of note that the ECB is raising the issue of a precautionary credit line, linking it to the waiver for the Greek banks.
A precautionary credit line does not imply that the third Greek assistance programme will not have been successfully implemented. There are also clear legacy issues in the Greek banking system that will take time to be addressed.
Do you estimate that the Eurozone will move on to a next stage as far as the relief of the Greek debt is concerned?
Our expectation is that Greece’s euro-area creditors will follow through on their commitment to providing further debt relief over the medium term. This could well take the form of further maturity extensions, given that Greece’s gross borrowing requirements will start to rise above 15% of GDP in the next decade after EFSF repayments start in 2023.
Do you consider that we are moving towards a form of debt relief which will be linked to the continuation of reforms from Greece? And is this a factor that acts as a safeguard in your ratings?
Euro-area creditors have previously linked debt relief measures to the successful implementation of the third programme, which we expect to be completed this year. Debt relief will be credit positive for Greece, as is the support of its fellow euro area members.
What would you say are the risks during this final stage of the Greek program?
We think the Greek rating is more likely to be upgraded than downgraded over the near term, as reflected in our positive rating outlook. However, downside risks would include the Greek government deviating from the commitments and reforms that it has previously agreed to, or tensions arising with other euro area creditors for any other reason.
How do you assess the level of political stability in Greece? For instance, early elections would mean something distinct as far as the achievement of the goals of the Greek economy is concerned?
We think that domestic political risks have declined in Greece, as reflected in our shift to a ‘moderate (plus)’ political risk score, from ‘high (plus)’ previously. We expect elections to take place during 2019, and while popular discontent with reforms remains elevated, opinion polls suggest consistent and high support for parties that are in favour of continued euro area membership.
How do you assess the non-performing loans parameter in Greece and what are your broader observations regarding the Greek banking system?
The non-performing loan (NPL) ratio in the Greek banking system remains very high, but has now started to gradually decline. However, economic growth alone will not reduce this stock of problem assets very quickly; so efforts to actively reduce these legacy problems, with policymakers’ support, are very important. NPLs are being tackled in a more forceful manner than at any time over the past eight years. The legal and technical requirements for conducting electronic auctions – a key measure for banks to realize collateral and accelerate the clean-up of their balance sheets – are now in place and the banks themselves have committed to individual NPL reduction targets. Resolving these legacy issues will both improve the credit standing of individual Greek banks, and allow them to better support growth via increased new lending to the private sector.
In addition, it is positive that the banking system’s reliance on emergency liquidity assistance (ELA) from the Bank of Greece and the Eurosystem has been on a declining trend over the past year, and customer deposits have been returning to the system. The banks were also able to issue covered bonds in 2017 and in January 2018, diversifying their funding away from central bank financing.
So, what is going to determine a further upgrading of the Greek state's creditworthiness in the next period? What are the critical parameters?
There are no absolute thresholds that determine rating upgrades or downgrades. Our positive outlook reflects the fact that we think an upgrade is more likely than a downgrade in the near term. The rating could be upgraded again if further reforms are enacted beyond the adjustment programme that, in turn, result in sustained stronger-than-expected economic growth and a more rapid fall in the public debt ratio.