Why Greece is one step away from an investment-grade rating

Greece is on the cusp of regaining investment grade status more than 12 years after losing that important credit rating, marking a sharp reversal for an economy that was roiled during the euro area’s sovereign debt crisis.

“Greece is an exceptional economic story,” says Filippo Taddei, senior economist for Southern Europe at Goldman Sachs. In the days leading up to a general election in Greece, we spoke with Taddei about the factors driving Greece’s economic revival, whether that growth is sustainable and what it means for the country to regain investment grade status.

What’s happening in Greece’s economy?

Greece is an exceptional economic story. We’re looking right now at an economy that is growing almost three percentage points above what we expect the pace of growth to be in the euro area. Looking ahead to 2024, we see that gap receding to something just below 2%, but that’s still an economy growing much faster than its peers. On top of that, Greece is looking at inflation coming down more quickly than its peers. So, by and large, it’s a very strong readout from Greece.

How did the country turn itself around?

At first, the recovery was slow and gradual. Remember, with Greece we’re talking about an economy that lost more than a third of its GDP from its peak to trough in 2013. Then it began slowly climbing back, with a few years of slow growth. That part of the story isn’t surprising because when you lose so much of your GDP, growth is going to be elusive in terms of a country’s ability to invest, produce capital and foster productivity. Of course, Covid dealt a blow to most countries’ economies, and Greece was no different. 

But what’s very interesting — and somewhat surprising — is what has happened after Covid. Starting in 2021, but especially in 2022 and onward, the level of economic activity in Greece has been remarkably strong.

What’s driving Greece’s economic resurgence?

There’s a cyclical component, especially in tourism, which is part of the story and can’t be ignored. But the main driver is the pickup in capital expenditure and capital formation, what is generally referred to as investment. Greece has built up its productive capacity, in terms of more plants, buildings and machinery. That’s a critical economic driver and something we haven’t seen much activity in in prior years.

Throughout the past decade, Greece invested as little as 10% of its GDP on a yearly basis. To give a sense of what that means, before the Global Financial Crisis, Greece was investing about 24% of its GDP every single year. So 24% goes to 10% a year for a decade — with some volatility — and imagine what that does to a country.  Now, capital expenditure is building across Europe and especially in Greece, where spending is expected to be at least 50% higher than it was.

Where is the spending and investment coming from — the public or private sector?

Greece has an unprecedented opportunity as it is set to receive a long-lasting — until 2026 — fiscal support package in excess of 3% of its GDP per year. Since the sovereign debt crisis, Greece has invested almost 7% of its GDP in capital formation less than the rest of the euro area. The boost from the European fiscal package will go a long way to help Greece narrow that long-standing investment gap it has with the rest of the region.

So that’s the story of public investment. However, that typically trickles down into private investment — and that’s exactly what we’re beginning to see now. For Greece, capital investment starts with the 3% fiscal support, but it doesn’t end at 3%. It’s the private sector that is making big moves in Greece and that bodes very well for the future.

What are the potential ramifications from the upcoming election?

The outcome of the general election will be important to finalize the implementation of the RRF (the European Recovery and Resilience Facility) and secure long-run growth through capital accumulation.

We’ve been watching the polls and we recognize the option of a coalition government or even another election. Regardless of the specific outcome, a commitment to back the RRF to foster and facilitate the structural transformation of the economy is one of the most important things to watch for. The government has said it plans to triple RRF spending throughout 2023 and a convincing delivery of this commitment will likely be the final step for Greek government bonds to regain their investment grade rating.

Why is an investment grade rating important for Greece?

When a country does not have an investment grade sovereign rating, it’s not an investment option for a variety of institutional investors, for instance those who have mandates only to invest in investment grade securities. So, if Greece takes just one more step forward, then long-term investors like big pension funds and insurers, among other investors, can step in and start investing in Greek securities for the first time in a very long time. This change would contribute to providing cheaper and stable funding for the country’s future investment needs.

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