Greece’s credit rating upgraded to Baa3 by Moody’s Ratings

Investing.com -- Moody’s Ratings has upgraded Greece’s long-term local and foreign currency issuer ratings to Baa3 from Ba1 on March 14, 2025. The ratings agency has also improved the local currency senior unsecured ratings to Baa3 from Ba1, along with the foreign currency senior unsecured shelf and senior unsecured MTN programme ratings to (P)Baa3 from (P)Ba1. The foreign currency other short-term rating has been lifted to (P)P-3 from (P)NP. The outlook for Greece has been changed to stable from positive.

The upgrade is a reflection of the increased resilience of Greece’s sovereign credit profile to potential future shocks. The public finances of the country have improved more rapidly than Moody’s had anticipated. The agency expects Greece to maintain substantial primary surpluses due to the government’s policy stance, institutional improvements, and a stable political environment. This is expected to steadily reduce Greece’s high debt burden. Furthermore, the banking sector’s health continues to improve, limiting the risk of a banking sector-related credit event that could negatively impact the sovereign’s credit profile.

The stable outlook is a balance between Greece’s slow-to-improve main credit challenges and positive prospects related to the stability of the institutions and the policy stance. The Greek authorities are using the positive momentum created by the Recovery and Resilience Fund (RRF) resources to robustly implement credit-supportive policies.

Local currency and foreign currency country ceilings have been raised to Aa3 from A1. This reflects the benefits from the euro area’s strong common institutional, legal and regulatory framework, as well as liquidity support and other crisis management mechanisms. It also reflects Moody’s view of de minimis exit risk from the euro area.

Greece’s public finances have outperformed Moody’s baseline expectations over the years, increasing confidence that Greek debt will remain on a firm downward path. These improvements are due to ongoing expenditure restraint and rapidly rising tax revenues due to ongoing institutional improvements in tax compliance and collection. In 2024, Greece generated an extra EUR2 billion in tax revenue through its anti-evasion efforts, including a narrowing in the VAT gap.

Looking forward, Greece is expected to continue to run large primary surpluses, and Moody’s anticipates that they will remain at 2 to 2.5% of GDP over the medium term. This will be achieved through a combination of expenditure restraint and stable revenue generation.

Greece’s debt-to-GDP ratio has declined by about 50 percentage points since its peak in 2020, and it is down by around 27 percentage points relative to pre-Covid levels. Moody’s estimates that it stood at 156.1% of GDP at the end of 2024 and projects that it will decline to 148.3% and 140.6% in 2025 and 2026 respectively.

The banking system’s asset quality and capital adequacy continue to improve. Asset quality has continued to improve and will converge to EU levels, though nonperforming loan (NPL) levels remain one of the highest in the EU. Capital adequacy metrics are also improving due to strong organic capital generation, despite dividend payments in 2024-25.

The stable outlook balances the fact that some of Greece’s main credit challenges will be slow to improve against the positive credit elements of a stable institutional and policy environment.

Upward pressure on Greece’s Baa3 ratings could emerge if there were signs of accelerated reform implementation or reductions in Greece’s debt burden significantly exceeding current expectations. Conversely, downward pressures on Greece’s Baa3 ratings could emerge if the policy path seen over the past years was to be reversed, or if there were indications that past reforms are not delivering the growth and fiscal benefits that are currently expected.

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