Greek economy: Investment grade recovery and what to expect

The upgrade is expected to help reduce the borrowing rates of the Government and banks, and by extension the lending rates of businesses and households in Greece

The recent upgrade of the credit rating of the Greek State to the investment grade (BBB-) by one of the three major American ratings agenciess, Standard and Poor’s, is undoubtedly a reward for the economic policy of the government.

Lagarde to Mega: «Amazing turnaround» in Greek economy

As S&P points out, the country’s fiscal situation is improving, supported by the EU Recovery Fund until 2026, while structural reforms are contributing to strong growth, reducing the debt-to-GDP ratio. The growth rate of the Greek economy remains above the eurozone average, while tourism has already surpassed pre-pandemic levels. NPLs left behind by the crisis have fallen significantly and bank profitability is improving.

The upgrade is expected to help reduce the lending rates of the Government and banks, and by extension the lending rates of businesses and households in Greece. This is planned to be done in two ways:

1. The possibility of large foreign institutional investors to invest in Greek Government bonds. Institutional investors such as pension funds and insurance companies are prohibited by their statutes from investing in bonds of countries classified below investment grade.

2. The possibility for Greece to participate in quantitative easing programs of the European Central Bank, buying Greek government bonds and thus reducing their yields.

Some observations:

1. In order for large institutional investors to invest in Greek government bonds, two of the three major credit rating agencies would have to upgrade Greece to include it in their investment grade bond indices. This may happen in early December, when Fitch is expected to rate Greece, but it is not certain. Alternatively, we will have to wait for Moody’s assessment next year.

2. The quantitative easing program is complete. The ECB has entered a period of quantitative tightening as it reduces its bond holdings, drawing liquidity from the market to reduce inflationary pressures. Therefore, we do not expect a direct impact on borrowing rates in Greece from this source.

3. Greece’s upgrade to investment grade has already been discounted by the markets. The risk premium (spread) of the ten-year Greek government bond has decreased from 200 basis points (2%) at the end of 2022 to less than 150 bp. (1.5%) today.

We should not, therefore, expect that there will be a noticeable reduction in the borrowing rates of the Greek State, or the rates at which banks draw liquidity and channel it into the economy. In any case, however, the recovery of investment grade is a “shield” for Greek bonds, as the uncertainty created by the Israel-Hamas war may push up bond yields worldwide.

Miranda Xafa is an investment advisor