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Greece: Fiscal Discipline and Sustained Growth Key to Debt Sustainability

This commentary discusses Greece's fiscal and debt targets for the period 2023-2025. DBRS Morningstar views Greece's commitment to fiscal discipline positively. However the implications of Russia's invasion of Ukraine create added uncertainty surrounding the projections. A longer lasting impact on commodity prices and inflation could result in lower growth. Additional measures may be needed to mitigate the impact on businesses and households. A prolonged or broader conflict could intensify the pre-existing impacts of the pandemic, result in weaker growth, and further delay the rebalancing of fiscal accounts. Despite the absence of strong economic ties with Russia, Greece's economic growth is set to decelerate this year to 3.1% according to the Stability Programme, from initial estimates of 4.5%. This is mainly due to increased commodity prices and the negative impact of high inflation.

Key highlights include:
-- DBRS Morningstar views Greece's commitment to fiscal discipline positively, however, takes note of the uncertainty surrounding the projections.
-- Going forward, debt reduction will be supported by the low cost of borrowing and two other factors; (1) Greece's ability to return to and sustain primary surpluses and (2) achievement of solid nominal growth rates.
-- The impact of the adverse geopolitical developments and the uncertainty around the duration of the conflict pose downside risks to the outlook.

“The sequential crises - the pandemic and the war in Ukraine - reiterate the importance of strengthening economic fundamentals, increasing economic diversification, and maintaining fiscal buffers that could support the ability of the economy to cope with unexpected economic shocks,” said Spyridoula Tzima, Assistant Vice President at DBRS Morningstar. “The impact of the adverse geopolitical developments and the uncertainty around the duration of the conflict on economic activity, consumer and business confidence, energy prices and food prices pose some downside risks to the economic outlook in the near term, but Greece's economic fundamentals will ultimately determine whether the high debt burden remains sustainable,” added Spyridoula Tzima.