The European Commission’s third post-programme surveillance report, published today, concludes that Greece maintains its ability to service its debt.

“Greece maintains the ability to service its debt. Despite the many challenges, the Greek economic, fiscal and financial situation remains resilient,” the report says.

According to the debt sustainability analysis, Greece is estimated to face low risks in the short and long term, while medium-term risks appear to be high due to the still high debt-to-GDP ratio. The government’s gross financing needs for the period 2023 to 2025 are low, due to projected large primary surpluses and modest debt amortization. It is noted that Greece requested the early repayment of €5.3 billion of the Greek loan facility in 2023. Principal repayments for the EFSF loans started this year, while the repayment of the ESM loans will not start until 2034.

“Greece has very large cash reserves and continues to have market access and regular successful bond auctions“, emphasizes the Commission.

The post-programme surveillance report assesses the economic, fiscal and financial situation of Member States that have benefited from financial assistance programmes. The post-programme surveillance mission to Greece took place between 2-5 October 2023 and involved the European Commission, in collaboration with the European Central Bank, as well as the European Stability Mechanism (ESM) and the International Monetary Fund. The report records available information and political developments that have taken place up to 31 October 2023.

“The Greek economy proved resilient to external shocks and expanded by 5.6% in 2022,” the Commission’s report emphasizes. After a strong output expansion in 2022, economic activity is expected to moderate, with GDP growth exceeding long-term growth potential. Real GDP is expected to grow by 2.4% in 2023, 2.3% in 2024 and 2.2% in 2025, according to the Commission’s autumn forecast. In addition to consumption, gross fixed capital formation is expected to be a key driver of growth as the implementation of the Recovery and Resilience Plan supports investment. Recent natural disasters are expected to have a relatively small impact on GDP growth in 2023, as affected areas account for a limited share of total value added.

After falling sharply in the first half of 2023, inflation is expected to continue to decline, albeit at a slower pace, due to the waning negative base effect of previous energy price shocks and steady wage growth amid tighter market conditions work.

Employment is projected to increase further, albeit at a more moderate pace in line with economic activity.

The current account deficit narrowed in 2023 and is expected to narrow in the coming years. However, the external balance is likely to remain in significant deficit.

The fiscal balance is projected to record a stable primary surplus until 2023. The primary balance is expected to improve further compared to 2022 and reach a surplus of 1.1% of GDP in 2023, due to the significant reduction in the cost of fiscal support measures for tackling the energy crisis.

To deal with emergencies related to recent natural disasters, the government provided immediate support to households and businesses, thereby increasing fiscal spending.

The primary surplus is expected to widen further in 2024-2025 on the back of subdued expenditure growth and steady revenue growth.

The stock of arrears fell, but the reduction was uneven: while progress was satisfactory in the pensions sector, the persistently high stock of arrears in hospitals and additional fiscal funds requires structural improvements.

Bank profitability remains strong, but the handling of non-performing loans, particularly by servicers, continues to face challenges. In 2022 and the first half of 2023, banks benefited from an increase in interest margins that boosted bank profitability, allowing them to strengthen their capital ratios. However, interest margins are expected to narrow due to rising funding costs, including higher deposit rates. The decline in the stock of non-performing loans (NPLs) has stalled in the first half of 2023, after a significant improvement to single-digit levels in recent years. This shows the potential difficulties for banks to sustain NPL reduction through organic plans. The planned restart of the Hellenic Asset Protection Scheme (HAPS) is expected to contribute to the further reduction of NPLs. Some portfolios securitized under the original HAPS continue to underperform from original business plans as servicers’ handling of non-performing debt continues to face challenges. These challenges include delays in court proceedings, a still high rate of unsuccessful auctions and, to a lesser extent, relatively low – though growing – acceptance of out-of-court proceedings. Effective creditor debt restructuring and an effective debt enforcement function, combined with a functioning secondary market for NPLs, will be key to further reducing NPLs and thereby supporting economic performance .

The management of public assets is made more efficient thanks to the new law on the governance of state-owned enterprises. In the first half of 2023, the Hellenic Property and Holdings Company achieved the highest income ever received from the dividends of its portfolio companies. Privatization transactions are proceeding broadly according to plan.

Finally, it should be noted that by the end of October 2023, Greece has been upgraded to investment grade by two of the four credit rating agencies recognized by the ECB in the context of monetary policy implementation. The main reasons for the upgrades were a continued commitment to fiscal responsibility, a resilient economy and the implementation of economic reforms. Greece is one notch below investment grade in the other two rating agencies.