GIG: Greek borrowing rates have improved considerably, more so than Greek ratings have. Is that, in your opinion, a fair reflection of the improvement in the underlying fundamentals of the Greek economy? Is the European Securities and Markets Authority (ESMA) framework an obstacle in the timelier reflection of fundamentals in ratings?
Muehlbronner: Bond yields and ratings do not necessarily move in sync. Our ratings reflect our opinion of a sovereign’s creditworthiness over the medium term. Meanwhile markets generally have a much shorter timeframe, and hence are more volatile.
That said, the reduction in bond yields is good news for the Greek sovereign because it reflects an improvement in investor confidence that is based on real economic and fiscal improvements. Lower funding costs help the government’s efforts to maintain solid public finances and bring the very high debt ratio down. We do not comment on the approach of regulators.
GIG: Recently, rates seem to have plateaued. What are the challenges that Greece needs to focus on for a further de-escalation in rates?
Muehlbronner: Greece’s key challenges from our point of view are (1) moderate growth prospects and (2) very high public debt burden.
On (1): while we expect real GDP growth to accelerate in 2020 (to around 2.5%), such growth rates would still be more moderate than other euro area countries emerging from the crisis. Investment in particular has been very weak, and while some of the reasons for this weak performance are lessening (high corporate tax rates, political uncertainty, and the existence of capital controls), other impediments will take longer to resolve – red tape and an inefficient bureaucracy and legal system and a banking sector that it too weak to support the recovery in a meaningful way. The recently approved Hercules scheme for accelerating the disposal of non-performing loans could be an important positive development.
On (2): continued strong public finances are essential to bring down the debt ratio at a faster pace than currently expected.
GIG: In an ideal scenario, what time frame would you envisage for Greece to achieve a Aaa rating? What would it take?
Muehlbronner: We do not speculate about the timing of rating actions. Greece’s sovereign rating is currently B1, so far away from Aaa. We never rated Greece at Aaa, even before the global financial crisis.
Looking at other euro area countries that had a severe crisis for comparison: we currently rate Ireland at A2, Portugal at Baa3 (with a positive outlook) and Cyprus at Ba2 (also with a positive outlook). Of these Cyprus is probably the closest peer: the lowest rating was Caa3 in January 2013, after the debt restructuring. It took five and a half years to get back to the current Ba2 rating (July 2018).
GIG: The Greek banking sector is still experiencing tight liquidity and some corporates are turning to bond issues. Do you see this as a temporary shift, or the start of a more permanent switch to non-bank lending?
Muehlbronner: We don’t have a specific view. But it has often been observed that once corporates have gone through the effort to raise money on capital markets, they continue to use bond markets. It just broadens their financing options and as such is generally positive.
GIG: What would be the key downside risks to your rating at the moment?
Muehlbronner: Disappointing GDP growth, which would probably not be due to domestic reasons but a consequence of a worsening global growth environment. This could negatively affect confidence in the recovery of the Greek economy, with negative impact on spending and investment.