Most Improved Country: Funding Capacity

Fiscal prudence and GDP growth have allowed Greece to improve government debt to sustainable levels, with credit agencies upgrading the country’s outlook.

In 2009, Greece faced an economic crisis and entered recession after defaulting on its debt, largely as a result of heavy borrowings and overspending by the government (mainly on wages and defence). As a direct consequence of this, until 2017 all major credit rating agencies had a stable to negative outlook for Greece, commensurate with ratings in the C category.

To address the crisis, Greece received financial support from the IMF, the EU and the European Central Bank totalling USD 330 billion. It also implemented austerity measures that lasted for years. Reforms across the economy have been critical for Greece to achieve economic stability (and growth) and prudent fiscal settings.

The reform programme appears firmly entrenched and its implementation is starting to bear fruit. A strengthening economy in conjunction with creditor surveillance should further reduce risk of regression. Reforms to Greece’s public sector creditors reflects the strengthening of Greece’s institutions. Competitiveness has also improved, marked by reduced labour costs and increase in exports. Exports accounted for 36% of GDP at the end of 2018, compared to 22% in 2010.^[1]

The track record of strong fiscal performance is now firmly established and appears likely to be sustained, since most of the fiscal improvement is due to structural measures, including pension and health care reforms as well as efforts to contain the public-sector wage bill and employment. The establishment of an independent tax revenue administration (Independent Authority for Public Revenue) in 2017 has also improved tax compliance and raising tax revenue.

Public debt sustainability has significantly improved over the medium term by the debt relief package agreed with Greece’s euro area creditors in June 2018. Greece has successfully reestablished market-based funding, supported by a very large cash cushion and strong creditor support.^[2]

The effectiveness of the reforms is evident in the acceleration and broadening of economic recovery, with a GDP growth rate of 2% in 2019, and the projection for the debt-to-GDP ratio to remain on a downward trajectory (although long-term sustainability will require Greece to follow pro-growth policies)^[3]. Greece also no longer has a borrowing arrangement with the IMF, although the two parties continue to undertake formal consultations annually on macroeconomic and financial sector issues.^[4]

As a result, since mid-2017 Greece has achieved a consistent stable to positive outlook from all major credit rating agencies, with ratings in the B category^[5]. Credit ratings are used by investors to determine the credit worthiness of a country, therefore it has a significant impact on enabling investment in Greece.