Fitch – ECB decision supports the sustainability of Greek public debt

The announcement of the European Central Bank that it can buy Greek government bonds until the end of 2024 reduces the risk of a sharp increase in borrowing costs as the pandemic emergency purchase program (PEPP) expires, according to Fitch Ratings.

The agency also emphasizes that the next scheduled review of Greece’s credit rating ‘BB’ / Stable is on January 14th. “Greater confidence in government debt / GDP returning to a steady decline after the Covid-19 shock, continued improvement in asset quality in systemically important banks and better medium-term growth potential and performance could lead to positive action for evaluation,” it underscored.

The international rating agency said the ECB on Thursday confirmed that PEPP net asset purchases would stop by the end of March 2022, but extended the bond reinvestment period, which was set to expire, by one year until the end of 2024.

The ECB also said that during possible market pressures related to the pandemic, PEPP reinvestments “can be flexibly adjusted over time”, including the Greek bond market.

According to Fitch, PEPP has been an important source of funding flexibility for Greece, whose government bonds are not eligible for other ECB market programs due to the fact that it is out of investment grade.

By the end of November, the ECB had purchased € 34.9 billion (19.3% of projected GDP 2021) of Greek government bonds, close to the amount provided by the PEPP of € 1.85 trillion and 2% of capital of Greece to the ECB.

The report emphasizes that the PEPP markets contributed to the maintenance of the marginal interest rates of the Greek debt, with the 10-year yield falling to about 1.3% from over 2% in May 2020.

Liquidity

Other factors also support the sustainability of public debt. Greece’s significant liquidity reserve is projected to be close to 18% of GDP at the end of the year, which would cover the international rating agency’s debt service estimate in 2022. “The favorable nature of most debts means that the average service cost it is low (in absolute numbers and in relation to peer ratings) and the amortization programs are manageable “he emphasizes.

In addition, the Greek authorities managed the amortization schedule as a precaution.

Fitch estimates that a recent liability management exercise reduced depreciation for the period 2023–2025 by approximately € 1.1 billion (0.5% of projected GDP 2023).

The average maturity of the Greek debt is one of the highest in each country, at about 19 years. Press reports state that Greece will repay its outstanding loans from the IMF next year (approximately 1.85 billion euros). “We had previously estimated that a large, permanent increase in market interest rates would increase the debt ratio, but only by about 4.5 percentage points over five years,” the report said.

Despite these mitigations, Greece’s very high public debt is an inability to assess. We estimate that public debt to GDP in 2021 fell from the 2020 ceiling of 206.3% of GDP to 197.3 %% – it is still the third highest among government states with a Fitch rating.

Forecasts for the economy

Lower deficits and steady economic growth will support debt reduction. We forecast real GDP growth of 8.3% this year and expect the recovery to continue in 2022 as the next generation of EU capital recovery accelerates and increases real spending, with growth of 4.1% and 3.6% in 2022. and in 2023. But the debt index will remain high, just below 188% in 2023.

Fitch also believes that the ECB will remain flexible enough to avoid negative impacts on the financing and liquidity of Greek banks. The special terms under the third series of targeted longer-term refinancing operations (TLTRO-III, approximately 20% of sectoral funding) are scheduled to expire in June 2022, but the two-tier reserve remuneration system may be adjusted to reduce costs. funding. They also believe that the ECB could extend its waiver to include Greek public debt as repo collateral beyond June.

Greek banks

The financing and liquidity profiles of Greek banks have improved structurally in recent years, supported by a healthy increase in customer deposits and better access to the debt market. Banks have increased unsecured debt issuance to meet future consolidation requirements and will be able to increase secured interbank lending as TLTRO-III lending expires, albeit at a higher cost.