Moody’s upgrades Greece’s outlook but not credit rating

Moody’s credit rating agency upgraded the outlook for the Greek economy to positive from stable on Friday, while reaffirming its Ba1 credit rating.

Moody’s explained that the shift to a positive outlook reflects the increased likelihood of sustainable improvements in the resilience of the banking sector, reducing the risks of government debt assumption.

Additionally, with economic growth and fiscal performance potentially exceeding expectations, Greece’s fiscal strength could improve faster than currently anticipated.

Moody’s confirmed Greece’s Ba1 ratings, citing significant progress in recent years in implementing structural reforms and achieving fiscal consolidation. However, challenges remain in areas such as improving judicial efficiency, addressing macroeconomic imbalances, and managing the country’s high public debt burden.

The health of Greece’s banking sector has already seen substantial improvement in recent years, with Greek banks nearing the EU average across several financial stability indicators. According to European Banking Authority (EBA) data for the first quarter of 2024, capitalization ratios are close to the EU average, with Greece’s CET-1 ratio at 15.5%, compared to the EU average of 16%. Greek banks also boast the lowest cost-to-income ratio in the EU and stronger profitability.

While the non-performing loan (NPL) ratio remains higher than the EU average, Moody’s expects it to approach the EU average of 1.9% within the next one to two years. The potential further reduction in NPLs is likely to benefit from the announced increase of the “Hercules” program by 1 billion euros, up from its initial 2 billion euros.

Improving banking sector health and the reduced risk of potential government liabilities are also evidenced by the sale of the Hellenic Financial Stability Fund’s (HFSF) stake in Piraeus Bank in March 2024, and plans to divest most of its stake in National Bank by the end of the year.

If maintained, the improved financial health of the banks will better position them to manage potential future shocks without increasing the risks of government liabilities.