Category: Forex News

Continued Debt Reduction And Structural Reforms Crucial For Greece’s Sovereign-rating Trajectory

The economy’s medium-run growth potential remains tepid around 1% despite continued progress on reforms through the “Greece 2.0” and Greek Recovery and Resilience plans. Constraints include adverse demographics, as well as weak and uneven productivity growth across the regions because of years of public- and private-sector under-investment and a lack of business-sector dynamism.

Political Stability And Policy Continuity Crucial To Sustaining Investor Confidence

The recent out-performance of the Greek economy gives us confidence that robust economic growth is not transitory, but there are nevertheless several challenges for the outlook. Persistent uncertainty over the inflation outlook raises questions of whether inflation will continue to decline towards the ECB 2% objective. Core inflation sits well above 2% despite recent significant disinflation.

We see inflation remaining above the ECB objective for much of this year. Furthermore, we cannot exclude new supply-side crises in view of a turbulent international political and economic context, which might again send inflation higher later and further postpone the fuller normalisation of monetary policies.

Environmental challenges are also relevant. Among the EU, Greece is most exposed to rising temperatures and more frequent heatwaves and wildfires, which can damage the crucial tourism and agriculture sectors.

Finally, new political challenges could emerge following general elections due by 2027 if the government shifts away from current business-friendly policies. Maintaining a constructive dialogue with European institutions and the capital markets is relevant, as is avoiding the temptation of further reversing the difficult reforms introduced during the debt crisis.

Regaining investment-grade status has contributed to the narrowing of yield spreads on 10-year Greek government bonds – to under 100bp to Germany recently – reflecting significantly better investor confidence.

Further progress on reforms to strengthen the structure of the economy and enhance macroeconomic sustainability would contribute to improving Greece’s appeal for foreign and domestic investors. Moreover, the presumed peak in the ECB rate-hike cycle ought to facilitate investment.

For a look at all of today’s economic events, check out our economic calendar.

Dennis Shen is Senior Director in Sovereign and Public Sector ratings at Scope Ratings GmbH, and lead analyst on Greece. Alessandra Poli, Analyst at Scope, and Matthew Curtin, Deputy Head of Communications of Scope, contributed to writing this article.

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