Risk of political instability overshadows return to investment grade

Bank officials have urged Greece to pick up efforts to recover its investment grade status in 2022, rather than 2023 as aimed for by the government, warning of the significant risks to the economy and lenders when the pandemic measures are withdrawn due to the country’s credit rating: it is the only eurozone state without an investment grade.

"It's not just an issue for Greece," a bank source tells Business Daily. "There is already a lot of pressure to limit emergency liquidity measures. Interest rates will rise at some point, central banks will stop the quantitative easing and it is vital that Greece is considered debt worthy by the market and investors." The bloc of northern EU countries believes that the withdrawal of emergency measures to deal with the pandemic should begin immediately.

Eurobank CEO Fokion Karavias, in an interview yesterday, stressed that we cannot be the only eurozone country with government bonds in the "junk" category, adding that the country’s top goal should be to recover its investment status. "The government borrows cheaply today, because there is plenty of liquidity in the market, due to the policies of the central banks and especially due to the ECB's special program for the pandemic. But it will not be like that forever. Even in conditions of declining liquidity, countries with low credit ratings are more exposed to the crisis. We cannot be the only country in the eurozone with government bonds in the junk category", the head of Eurobank told Kathimerini.

Greece has taken significant steps in recent months to recover its investment grade, and markets are largely anticipating this development. However, the rating agencies must be convinced of progress in the coming period on the 4 + 1 fronts: the sustainability of public debt, the return to fiscal discipline, the further consolidation of banks and efficient operation of loan servicers, and the acceleration of structural reforms. .

The spectrum of political instability

Along with these four challenges, another has been put forth which will be a key prerequisite for the upgrading of Greece’s credit rating: political stability. It is no coincidence that, despite the strong performance of the domestic economy in 2021, and the strengthening of forecasts for growth dynamics in coming years, both Moody's on November 19 and S&P a month earlier avoided any upgrades, despite expectations to do so. A few days earlier, Moody’s upgraded Italy, citing the restoration of political stability with the Draghi government as one of the main reasons for this decision.

And today the Mitsotakis Government and the prime minister’s dominance in the political scene might be ensuring political stability in the country, however, the spectrum of simple proportionality and the risk of it weakening the conservative government is boosting risks.

So, the rating agencies are not in a hurry to upgrade Greece and return it to the investment grade category, and adopt a more conservative policy as seen from Moody’s silence two weeks ago. Many analysts estimate that it is very difficult for rating agencies to give us the investment grade before the next national elections. They will wait for the result of the elections to make sure that there is no risk of political complications, they point out.

Besides, Greece has a negative track record, as political instability that prevailed after 2010 was the main reason for the failure of economic adjustment programs and the country’s subsequent derailment. Four electoral contests were required involving four prime ministers and the implementation of three bailout programs before the country could return to political stability.