Analysis: Prudence, reforms can help Greece regain investment grade after election
Having emerged from previous bailout programmes in 2018, Greece had been hoping to regain such ratings - rubber-stamping its return to fiscal normality - by early 2023, ahead of a national election that could stir political uncertainty.
But the COVID-19 pandemic and the energy crisis triggered by the war in Ukraine dampened its hopes. While high inflation is helping reduce its debt relative to gross domestic product, it is also eating away at its growth output and potential.
That means regaining investment grade has become something of a moving target for Prime Minister Kyriakos Mitsotakis, who is planning to call an election in the spring.
"The Greek economy has shown resilience during recent crises, supported also by the EU institutions," said Spyridoula Tzima, Vice President of ratings agency DBRS Morningstar.
"However, the macroeconomic environment has deteriorated, increasing the downside risks for Greece and the other euro area economies," said Tzima, adding that these challenges will not subside after the election.
Greece lost its investment credit ratings, which imply a very low risk of default, in 2010, a year after the country's debt crisis came to light, eventually forcing it to sign up to international bailout programmes worth about 260 billion euros to stay afloat.
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Four of the five major international rating agencies now rate Greece one notch below investment grade. The Moody's rating is still three notches away.
Greece this year is forecasting economic growth of 1.8%, down from 5.6% in 2022. It expects to achieve a small primary surplus of 0.7% of GDP after three years of primary deficits and sees its debt shrinking by 10 percentage points to 159% of GDP.
If high inflation persists for longer, however, it could slow Greece's growth further and constrain the European Central Bank in its vital support for Greece, Scope Ratings warned.
"A demonstration that Greece is likely to maintain prudent primary surpluses after its enhanced surveillance programme and following 2023 elections would be important for consideration of investment grade," said Dennis Shen, Scope Ratings Director.
The next election will be held under a proportional representation system, meaning it may not produce an outright winner and could lead to a second ballot, prolonging Athens' wait for a ratings lift.
Mitsotakis' conservative government has spent more than 40 billion euros since 2020 to support households with their energy bills, while pension hikes and a minimum wage increase will also kick in this year before the elections.
Rating agencies and economists have warned that an expected slowdown in Greek reforms that may affect investment, delays in decision-making and potential additional government spending could also hurt the economy - and affect their assessments.
The new government will also not have a grace period. It will need to demonstrate that it is serious about fiscal consolidation and reforms, they said.
"A prolonged period of political uncertainty could harm the economy substantially," said Nikos Vettas, head of Greece's leading IOBE think-tank. "What is crucial is not only to have a stable government without a major delay, but also one with a credible and ambitious plan for economic growth."
But most ratings agencies expect that Greece will reduce its debt and eventually meet its target for a primary surplus.
"We expect the budget deficit to decline further this year, placing government debt as a share of GDP on a discernible declining trajectory. This could put upside pressure on the ratings," Marko Mršnik, Senior Director and Analytical Manager at S&P Global Ratings, told Reuters.
JP Morgan also said in a euro area rating analysis that Greece could regain investment grade ratings "possibly post-election in late 2023 or early 2024", if Mitsotakis was re-elected.
His New Democracy party is leading in opinion polls over the leftist Syriza party that ruled Greece from 2015 - when the country risked being forced out of the euro zone - to 2019.
Mitsotakis said last month that if he were re-elected, the return to investment grade would be a matter "of a few months".
Fitch, which upgraded Greece last week, said that "abrupt policy changes are unlikely even if there is a change of government".