Research Update:

Greece Ratings Affirmed At 'B-/B'; Outlook Stable

Primary Credit Analyst: Marie-France Raynaud, Paris +33 (0)1 44 20 67 54; marie-france.raynaud@standardandpoors.com Secondary Contact: Marko Mrsnik, Madrid (34) 91-389-6953; marko.mrsnik@standardandpoors.com Analytical Group Contact: SovereignEurope; SovereignEurope@standardandpoors.com

Table Of Contents
Overview Rating Action Rationale Outlook Key Statistics Related Criteria And Research Ratings List

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Research Update:

Greece Ratings Affirmed At 'B-/B'; Outlook Stable

Overview
We believe the Greek economy is gradually rebalancing, as reflected in improved services exports and notable budgetary consolidation, which shows somewhat improved competitiveness and enhanced institutional capacity. However, the general government debt and the economy's external debt are still large, in our view. We are affirming our 'B-/B' sovereign credit ratings on Greece. The outlook is stable, balancing our view of the government's commitment to a fiscal and structural adjustment against the economic and political challenges of doing so.

Rating Action
On March 21, 2014, Standard & Poor's Ratings Services affirmed its long- and short-term foreign and local currency sovereign credit ratings on the Hellenic Republic (Greece) at 'B-/B'. The outlook is stable.

Rationale
Our long-term rating on Greece balances our view of the government's high (albeit long-dated) debt burden and the country's onerous external debt position, against Greece's relatively high (although still falling) GDP per capita, its significant budgetary and structural reforms, and official support from the European Union (EU), the European Central Bank (ECB), and the IMF (together, the "Troika"). We forecast that GDP growth will gradually recover in 2014-2017. We expect export growth, particularly services exports, should continue to improve on the back of a more favorable international environment, particularly in Germany and the U.K., which combined take more than 15% of Greece's exports. Investment should also progressively pick up given gradually improving credit conditions (reflecting a stabilizing domestic banking sector), increased scope for companies to invest in additional equipment, and the government's steady clearing of its arrears owed to suppliers. Nonetheless, we expect that Greece's household consumption will remain constrained by high unemployment (27%) and a sharp wage contraction, both of which have led to a more-than 20% decrease in disposable income since 2008. In our opinion, steps the Greek government has taken to strengthen the institutional framework and improve policy effectiveness have enhanced external and fiscal performance. In particular, the government has made

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Research Update: Greece Ratings Affirmed At 'B-/B'; Outlook Stable

significant reforms to the labor market and fiscal revenue collection and plans further reforms in commerce. Although we consider Greece's domestic political environment to be fluid, our forecasts assume that--regardless of composition--the Greek government will adhere broadly to the current policy framework. We also assume social tensions will abate as the bulk of fiscal consolidation is now done, and growth conditions are improving. We consider that the economy has started to rebalance. The adjustment in the current account balance, which turned slightly positive in 2013, compared to a deficit of 15% of GDP in 2008, has come about mainly via a sharp reduction in imports but also through increasing transport and tourism exports. The competitiveness index based on relative unit labor costs is below the 2000 level, which more than restores lost pre-crisis price competitiveness. The 2013 improvement in Greece's current account also reflects an increase in already-substantial net current transfers extended to the Greek government by the EU. We expect the current account to remain broadly balanced in 2014-2017. Despite this positive shift in external flow dynamics, Greece's external vulnerabilities persist given its high level of external debt, deflating economy, and limited monetary flexibility. We estimate external debt at about 400% of current account receipts in 2014 (net of public and financial sector external assets). In particular, about half of Greece's gross external debt stock is short term, mostly contracted by Greek banks, and has to be rolled over. In that respect, we anticipate that cross-border interbank deposits will stabilize, while ECB funding--about 20% of total banking system liabilities--will likely remain supportive. We view Greece's recent fiscal adjustment as significant. The government's fiscal deficit improved to 2.9% of GDP in 2013 from almost 16% in 2009; the 2013 figure excludes bank recapitalizations. The expenditure-side adjustment has been particularly notable (an 18% contraction in nominal terms in 2009-2012) compared to that on the revenue side; we view the revenue-side adjustment as more sustainable. There was a primary fiscal surplus in 2013, which we expect will increase until 2017 to about 2% of GDP given the expected rebound in GDP growth. That said, we believe that Greece may not meet the Troika's primary budgetary surplus target of 4.5% of GDP in 2016. We estimate the Greek government's gross borrowing requirements (including short-term debt maturing) at about 45 billion in 2014. This includes 25 billion of long-term general government debt amortization (of which 18 billion pertains to commercial debt principal payments, most of which is held by the ECB and eurozone national central banks, including the Bank of Greece), 15 billion of short-term debt, and a 4.3 billion fiscal deficit. We believe that about 22 billion of official funding (encompassing 2 billion in interest deferrals) from the Troika will help meet these funding needs, as well as a full rollover of the government's treasury bills held predominantly by domestic pension funds. We believe that the government will obtain the remaining 9 billion from a combination of sources:

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Research Update: Greece Ratings Affirmed At 'B-/B'; Outlook Stable Up to 3 billion in privatization receipts; About 2.5 billion from expected servicing of "pillar one bonds" (bonds that the Greek banks will start paying back to the government this year) and ETEAN bonds due in 2014, the latter being bonds issued by Greece's National Fund for Entrepreneurship and Development and held by the Greek government; Up to 3 billion of international bond issuance; A drawdown, if needed, of government deposits at the central bank up to 3.5 billion; or Increased treasury bill issuance (above the 15 billion threshold set by the Troika). We do not assume that the Greek government will use the 11.5 billion available at the Hellenic Financial Stability Fund (HFSF) to support its budget. This is because we believe that the government will need most, if not all, of the 11.5 billion to top up the capital requirements of Greek banks after the ECB asset quality review, expected in October 2014. In 2015, we expect Greece's gross borrowing needs to be approximately 34 billion, consisting of just over 16 billion in maturing long-term debt; 15 billion of short-term debt; and a 2.8 billion deficit. We believe general government financing sources for 2015 will include 9 billion of official lending and a combination of 2.5 billion of privatization proceeds, 3 billion further repayment of the pillar one bonds, and the increased issuance of Treasury bills and additional funding from the capital markets. Given the gradual replacement of maturing commercial bonds by official lending, we believe the stock of commercial debt will likely continue to decrease to reach below one-third of Greece's total debt stock. (We classify commercial bonds held by the Eurosystem as commercial debt in this calculation as we understand that the ECB will not agree to rollover these expirations, which total an estimated 16 billion between 2015 and 2018.) We forecast that Greek government commercial debt will continue to be mainly held by nonresidents, predominantly official creditors and Eurosystem central banks, through 2017 given that the EU has restricted Greek banks buying Greek sovereign bonds. In the wake of the second economic adjustment program and the debt buy-back programs, we believe the government's debt profile has strengthened significantly. The average maturity has lengthened to 16 years and interest payments have been deferred by 15 years, which has led to a significant reduction in interest payments to about 10% of revenues in 2014-2017 from a peak of 17% in 2011. Despite budgetary consolidation, the government debt stock has increased to about 173% of GDP in 2013, from 103% in 2008, on significant bank recapitalizations and a 23% peak-to-trough contraction of the economy. Nevertheless, given the maturity extension, the net present value of debt has declined, improving debt sustainability metrics. We project that government debt will continue to increase in nominal terms but decline as a share of the

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Research Update: Greece Ratings Affirmed At 'B-/B'; Outlook Stable

economy to 164% of GDP in 2017. We consider that the difference between corporate lending rates and the ECB policy rate will remain wide, both in the context of banks' weak asset quality--NPLs are more than 30% of total loansand a lack of credit due to banks' capital constraints.

Outlook
The stable outlook balances our view of the government's commitment to a fiscal and structural adjustment against the economic and political challenges of doing so. The outlook also assumes, at a 'B-' rating level of confidence, no further distressed exchange on the sovereign's remaining stock of commercial debt. We could raise our long-term rating on Greece if GDP growth were to pick up more substantially than we currently expect. This could reflect structural reforms to the labor and product markets bearing fruit more rapidly than we foresee, or the banking system rehabilitating to the extent that it can provide more-dynamic credit growth. We could lower the ratings if we believe there is a likelihood of a distressed exchange on Greece's remaining stock of commercial debt, due to a weakening of the political situation or delays to scheduled official creditor support.

Key Statistics
Table 1

Hellenic Republic of Greece - Selected Indicators

2007 Nominal GDP (US$ bil) GDP per capita (US$) Real GDP growth (%) Real GDP per capita growth (%) Change in general government debt/GDP (%) General government balance/GDP (%) General government debt/GDP (%) Net general government debt/GDP (%) General government interest expenditure/revenues (%) Oth dc claims on resident non-govt. sector/GDP (%) CPI growth (%) 305 27,599 3.5 3.4 6.8 (6.8) 107.2 105.2 11.8 93.8 3.0 2008 342 30,820 (0.2) (0.4) 10.3 (9.9) 112.9 110.6 12.6 97.3 4.2 2009 322 29,042 (3.1) (3.3) 15.8 (15.6) 129.7 128.0 13.4 94.1 1.3 2010 295 26,508 (4.9) (5.0) 13.4 (10.8) 148.3 143.3 14.6 118.5 4.7 2011 290 26,107 (7.1) (7.2) 12.3 (9.6) 170.3 166.0 17.0 121.7 3.1 2012 249 22,376 (6.4) (6.4) (26.4) (9.0) 156.9 150.2 11.2 120.5 1.0 2013e 241 21,655 (3.9) (3.9) 5.1 (13.1) 172.7 165.5 8.2 123.7 (0.9) 2014f 236 21,195 (0.3) (0.3) 0.4 (2.4) 174.5 167.3 10.3 124.1 (0.6) 2015f 241 21,681 1.9 1.9 0.5 (1.5) 171.1 164.0 10.8 122.5 0.3 2016f 248 22,292 2.3 2.3 2.2 (1.2) 168.6 161.7 10.8 120.3 0.5 2017f 256 23,011 2.7 2.7 1.0 (1.0) 164.4 157.7 11.0 117.8 0.8

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Research Update: Greece Ratings Affirmed At 'B-/B'; Outlook Stable

Table 1

Hellenic Republic of Greece - Selected Indicators (cont.)

Gross external financing needs/CARs +use. res (%) Current account balance/GDP (%) Current account balance/CARs (%) Narrow net external debt/CARs (%) Net external liabilities/CARs (%) 323.9 (14.6) (54.4) 366.5 384.8 360.7 (14.9) (52.5) 313.4 256.7 494.5 (11.2) (49.7) 462.7 396.3 542.8 (10.1) (41.5) 486.0 406.4 514.1 (9.9) (36.5) 396.9 289.2 440.1 (2.4) (7.9) 513.5 370.1 390.8 0.7 2.0 452.5 339.4 364.4 0.7 2.0 431.9 319.5 339.6 0.9 2.4 404.5 287.9 325.2 0.2 0.6 375.7 258.8 307.3 1.7 4.5 342.5 227.4

Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. CARs--Current account receipts. The data and ratios above result from S&Ps own calculations, drawing on national as well as international sources, reflecting S&Ps independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Related Criteria And Research

Related Criteria
Sovereign Government Rating Methodology And Assumptions, June 24, 2013 Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers, May 7, 2013 Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009

Related Research
Sovereign Defaults And Rating Transition Data, 2012 Update, March 29, 2013 How An Erosion Of Preferred Creditor Treatment Could Lead To Lower Ratings On Multilateral Lending Institutions, Aug. 26, 2013

In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts.

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Research Update: Greece Ratings Affirmed At 'B-/B'; Outlook Stable

The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook.

Ratings List
Ratings Affirmed Greece (Hellenic Republic) Sovereign Credit Rating Transfer & Convertibility Assessment Senior Unsecured Commercial Paper

B-/Stable/B AAA BB

Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.

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