Greek banks are likely to follow National Bank of Greece, which this week became the first of the big four to achieve an investment grade covered bond rating.
It means NBG’s covered bonds qualify for repo with the European Central Bank, boosting their appeal with bank investors. The other three major banks should follow since the same rating is also within their reach. And with sovereign upgrades in the offing, the covered bond ratings will travel higher still.
The country will on August 20 officially conclude its exit from the European Stability Mechanism (ESM) programme which, in the words of the European Commission, marks “a new beginning”. The Greek government now has a cash backstop of over €21bn in addition to a 10 year extension on the repayment of debt owed to the EU. A new sovereign debt offering will cement this positive news, though it doesn't need the money.
Compare and contrast with Italy where fiscal laxity and fresh elections are expected to dent confidence, while a vote in Greece would be between the incumbent pragmatic government, or a pro-European centre-right coalition. The primary budget surplus of around 3% of GDP and growth in excess of 2% next year are unlikely to be troubled.
It makes going long Greece and shorting Italy a compelling idea. Expressing that view with a covered bond trade could make sense given it’s a market that’s better protected from rates volatility.