S&P upgrades outlook on Greece credit rating but keeps Italy on hold

Greece’s sovereign credit rating outlook was upgraded to positive by S&P Global Ratings on Friday, while Italy’s was kept at stable, highlighting a divergence of the two southern European economies.

S&P said its decision was based on Greece’s recent progress in structural reforms, a surge in investment and its rapidly improving fiscal position, which have made the country one of Europe’s fastest-growing economies.

In contrast, S&P kept its outlook on Italy’s credit rating unchanged, saying it expected the country’s debt to decline gradually over the next few years but that this was “balanced against the risk of a reversal in the delivery of critical reforms” that could delay critical EU funding.

Data published by Eurostat, the EU’s statistics agency, on Friday showed that Greece last year returned to a primary budget surplus of 0.1 per cent of gross domestic product, which excludes the cost of interest payments, after two years of deficits.

However, S&P kept Greece’s credit rating below investment grade at “‘BB+/B”, while Italy’s remains in investment grade at “BBB/A-2”.

Greece, which has an election next month, has benefited from a surge in investment, a reduction in its vast debt burden and more efficient tax collection. Tourism in the country rebounded to reach 97 per cent of pre-pandemic levels last year, while Greek banks have cut toxic loans from 45 per cent of their balance sheets in 2017 to below 10 per cent.

The Greek economy has made one of the strongest recoveries from the Covid-19 pandemic of any eurozone country, growing 8.4 per cent in 2021 and 5.9 per cent last year, with growth widely expected to remain above the eurozone average over the next two years.

The country’s debt as a proportion of GDP fell from a peak of 206 per cent in 2020 to 171 per cent last year, according to S&P, which predicted that it would keep falling to just over 135 per cent by 2026.

Italy’s fiscal position also improved but its primary budget remained in a deficit of 0.1 per cent of GDP last year. S&P said it expected Rome to achieve a surplus from next year, while growth in Italy would accelerate from 0.4 per cent this year to 1.4 per cent by 2025.

“Anchored by the reintroduction of EU fiscal rules next year, authorities are set to pursue a gradual pace of consolidation over the next few years, posting slight primary surpluses by 2024, putting debt to GDP on a slight downward path,” S&P said. Italian debt would fall from 144 per cent of GDP last year to 136 per cent by 2026, it forecast.

S&P also revised the UK’s credit outlook to stable from negative, indicating that heightened economic risks have subsided.

“The government’s decision to abandon most of the unfunded budgetary measures proposed in September 2022 has bolstered the fiscal outlook,” S&P said, referring to former prime minister Liz Truss’s proposed fiscal agenda that sent UK government debt into a tailspin and raised risks for pensions in the country when it was announced.

While the agency affirmed the UK’s AA credit rating, it said growth would be below historical averages in the medium term.

Additional reporting by Jaren Kerr