A few days after upgrading Greece's credit outlook to "positive," Moody's elaborated on the factors influencing the country's Ba1 rating and the reasons it has not yet achieved investment grade status.
Moody's identified four key elements shaping Greece's credit profile: economic strength, institutional governance, fiscal stability, and vulnerability to event risk.
The agency noted that Greece's economic power is relatively weak due to a lack of diversification compared to its EU counterparts, alongside a low—though improving—investment index. The effective utilization of the EU Recovery Fund resources will be vital for boosting investments and supporting midterm growth.
Moody’s observed some improvements in institutional strength and governance, though challenges persist. Structural reforms have led to notable advancements in tax administration and compliance. While fully realizing the benefits of these reforms will require ongoing commitment, initial positive effects are already visible in governance metrics.
Moody acknowledged that although there has been progress in modernizing the judicial system, enhancing its quality and efficiency and addressing corruption will continue to be difficult, potentially impacting the business climate and investment landscape.
Greece's fiscal strength is regarded as weak, primarily due to its high debt levels, expected to remain above 120% of GDP for much of the 2030s. However, Moody’s noted a decline from 207% in 2020 to around 162% by the end of 2023, with projections of further reductions of over 15 percentage points by 2025.
Additionally, the country faces substantial potential obligations from public sector entities in financial services, which could negatively impact fiscal stability if they affect the government budget.
Lastly, Greece's susceptibility to event risks is assessed based on political risk, credit system stability, liquidity risk, and vulnerability to external shocks. Politically, while domestic stability is seen as a positive factor, Greece's NATO membership exposes it to geopolitical shifts, particularly in the context of the ongoing conflict in Ukraine.
Although banks still face challenges, there has been significant improvement, reducing the likelihood of a credit crisis requiring state intervention. Liquidity risk is low, thanks to a favourable public debt structure and substantial cash reserves. Moreover, Greece has strengthened its resilience against external shocks, evidenced by a decreasing current account deficit, projected to decline to 5% and 4.4% of GDP by 2025-2026, down from 6.3% last year.