Big three upgrade a game changer for Greek bond market
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Big three upgrade a game changer for Greek bond market

Acropolis, Athens, Greece - with crowds of tourists visiting the Ancient Greece site Parthenon and The Erechtheion

Continuation of reforms under New Democracy will be crucial to keeping long term investors

S&P put its stamp of approval on Greece’s credit last week, marking the latest milestone in a triumphant return to investment grade for the sovereign.

It is an important achievement for the country whose government bonds had been excluded from mainstream capital markets since the eurozone debt crisis of 2011.

However, it is crucial that the country maintains the positive steps it has taken to achieve the rating, and avoids falling back to junk status, if it is to reap the benefits of the decision.

Scope and DBRS set the stage for the upgrade, bestowing IG status on the borrower earlier this year. But S&P’s is the rating that will enable greater investment in the issuer’s debt, which may in turn catapult economic growth.

It is the first time in 13 years that one of the big three agencies has rated Greece investment grade and will have a marked impact on its abilities in the international arena. The most obvious and near-term benefit to recent IG ratings is the new eligibility of Greek government bonds to be used as European Central Bank collateral. That will push down its cost of funding at a time when global interest rates are still high.

S&P's upgrade now takes the country to a new level. GGBs tightened 6bp against Bunds on the day and its yield was showing a 50bp discount to BTPs.

While inclusion in some of the most important bond market indices, which would bring a big flow of funds from index trackers, requires an average rating of the three major agencies at investment grade, others require just one IG rating from a big three agency.

So S&P’s decision will expand Greek access to international pension and investment funds, who are excluded from buying junk, greatly increasing its potential investor pool.

While Moody's and Fitch are yet to upgrade the sovereign, this is a very good start. Fitch is set to review its rating by the end of the year, while Moody's put the country to Ba1 in September, just one rung below IG.

For a while Greece has demonstrated some prowess as a government borrower. It has now been five years since Greece began issuing bonds again, after a punishing debt crisis led it close to crashing out of the single market. The issue was eventually resolved with a debt restructuring package that imposed hefty losses on international bondholders.

Just a handful of years later and Greece has the capability to raise finance across the curve, including in less obvious maturities such as the 10 year segment.

Indeed, market participants say a full return to IG has already been priced in — and this isn’t surprising. Greek Debt to GDP post-pandemic has outperformed all 137 sovereigns rated by S&P. After peaking at 207%, it is estimated to drop to 162% in 2023 and then come down to 139% over the next three years.

Investments launched under the Recovery and Resilience Facility, the heart of NextGenerationEU, have bolstered growth at a crucial moment. The tourism sector, a key determinant in Greece's economy, is booming, despite material impacts caused by severe flooding and wild fires this year.

Economic growth is a very basic requirement for European sovereign borrowers, but must not be overlooked. Maintaining budgetary progress will be key for Greece to avoid slipping back to junk status.

S&P stressed in its rationale the importance of continuing to progress with reforms under recently re-elected liberal-conservative party, New Democracy. These span bolstering banking system stability and dealing with non-performing loans, as well as governance among the judiciary and public office.

This is vital to securing a committed following among investors in investment grade debt over the long-term. Anything less might see it undo all of the good work.

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