2023-07-03 11:43:36
The rating agencies will focus on the government’s programmatic statements, which they will examine in detail before proceeding to their next “verdicts” on Greece. The strong message of the election to continue the policy path focused on strengthening growth and investment and reducing the debt ratio unquestionably supports the upward trajectory of the country’s ratings and return to investment grade. However, the reforms the government says it will implement will determine the speed of this upgrade.
Although three of the four major rating agencies rate Greece just one step below investment grade and at “BB+” – DBRS, S&P and Fitch –, only S&P gives (since April) a positive outlook, which means possible rating upgrade in the next 6-12 months. The other two houses give stable prospects. This, according to the “logic” of the evaluations, means that first there will be an upgrade of the prospects and then the evaluation.
Of course, it is not excluded that the houses will directly upgrade Greece to investment grade in their next evaluation. As Société Générale notes, after all, Greece is wronged by the houses “as its assessment should be close to that of Italy”. However, the speed of the houses’ movements will be judged by how they will “read” the policy statements that the government will make next week. As S&P analyst Samuel Tilley pointed out to “K”, “reforms and fiscal results will be key elements for our next rating decision on Greece”.
What are they waiting for?
The most likely scenario is that first there will be an upgrade of the outlook and then the rating.
“The upgrade may take place this summer, but we believe that the rating agencies want to see the specific plans and measures of the new government before taking action”, as Themis Themistokleous, head of the investment office of UBS Global, notes to “K”. Wealth Management for Europe, the Middle East and Africa (EMEA). “Closer to investment grade is S&P, but it only recently raised the outlook to positive and may move to upgrade later this year or in early 2024. Fitch and DBRS have in the past often taken rating action overriding the outlook. However, in our view, Greece is likely to receive an investment grade rating this year, but to achieve an average investment grade rating it will likely need to wait until 2024. Only an average investment grade rating would include Greek bonds in major indices reference used by institutional investors and would create more sustainable demand for the bonds”, underlines Mr. Themistokleous. It is noted that DBRS’s assessment is scheduled for September 8, S&P’s for October 20, and Fitch has scheduled its own “verdict” for December 1. Although extraordinary evaluations are a practice of the houses, market players emphasize that the next scheduled evaluations are close anyway.
The governor of the Bank of Greece, Giannis Stournaras, said last week that after the government’s programmatic statements, it will be a matter of weeks, if not days, for the recovery of investment grade. Mr. Stournaras, according to information, was not referring to the possibility of extraordinary assessments, but to the fact that the planned ones start very soon and if the government’s program statements satisfy the houses, there is no reason for further delay.
Signal from Scope
Before the big houses “speak”, on August 4, there will be the evaluation of Scope Ratings, the European house which has been making moves for some time to join the group of houses that the ECB “listens to”. It has been noticed that very often the big houses follow the movement of Scope. For example, Scope was the first house to “upgrade” Greece to “BB+” (in November 2021) and was also the first to give a positive outlook (in December 2022).
And according to Scope statements, investment grade is quite likely in August, which will be an important signal for the markets despite the fact that its assessment is practically not taken into account in the ECB’s decisions. “The result of the elections is credit positive and supports the examination of Greece’s inclusion in the investment grade”, points out Dennis Sen, chief analyst of the house. “The election result consolidates economic stability and this will further strengthen confidence in the financial markets.
The benefits of investment grade recovery
Obtaining the investment grade and, at a later stage, exceeding it will strengthen the resilience of the Greek economy to exogenous disturbances and episodes of volatility of the international markets, will limit the cost of raising funds for the public and private sectors, will facilitate the management of public debt, making investments and strengthening economic growth, as the Bank of Greece noted in the Report on Monetary Policy 2022-2023.
The steps to “A”
The expected upgrade will bring Greece to the lowest investment grade category, the “triple B”, at least three steps away from the middle category, i.e. the “A” that the country had in 2009-2010. In order to therefore find Greece where it really was before the crisis, a lot of work will be needed. “An ‘A’ rated country has significantly lower sovereign debt ratios than Greece, much better financing terms, unquestioned support from lenders of last resort, strengthened banks and a longer phase of political stability,” Mr. Sen explains to Scope.
Capital inflows
In any case, the fact that Greece is close to taking the first step is certainly significant. As Axia Ventures notes, the return to investment grade will allow Greek assets to be put back on the radar of a larger number of investors, attracting enough quality and long-term horizon funds, while it will also facilitate the path to upgrading the Greek Stock Exchange in developed markets. Underlining the size of the public of investors to which the Greek assets will be “available”, Axia points out that in the developed markets the assets under management reach 52 trillion. dollars, compared to only 6.3 trillion dollars in emerging markets.
Calculating the inflows into Greek bonds is not an easy equation. It is also important that the Greek market is quite small and “closed”, in the sense that most of the approximately 75 billion euros of Greek bonds that are in free circulation are in the ECB (in the Central Bank essentially) – which were acquired from the emergency PEPP – and in Greek banks. The positions of foreign investors – which is also the most volatile category – is only 11% of all Greek bonds, according to the most recent data. In 2012, for example, foreign investors owned 80% of the free float of Greek bonds.
Buying bonds
As Bank of America analyst Erhon Satko points out, the repayments of the ECB’s cheap TLTRO loans and the continued reduction of excess liquidity mean that strong demand for Greek bonds from domestic banks is unlikely to continue at the pace of the recent past, while the shrinking of the ECB’s balance sheet with the end and reinvestments of the PEPP in 2024 will lead to more Greek bonds being available to foreign investors and a more balanced demand structure.
BofA estimates that the flows, due to the restructuring of the funds’ positions, towards the Greek bonds, when they are included in the international indices, will move to around 16 billion euros, but they will be gradual and most of them will concern more 2024 and then, so it’s an estimate over two years or so.
Société Générale, for its part, examined the 106 government bond funds that exist in the Eurozone, which have assets of approximately 54 billion euros and are a small fraction of the total of 7.4 trillion. euros which is the market size of the region’s government bonds with a maturity of more than one year.
As he estimates, Greek bonds will represent a little more than 1% of the Eurozone’s government benchmarks when they meet the inclusion criteria and will be equivalent to a passive demand of 650 million euros from these European funds.
The cost of borrowing
The above, of course, means that Greek bond yields – and therefore the borrowing costs of the Greek State – will decline, albeit to a lesser extent, as these positive developments for Greece have already been priced in, as shown by the rally they have recorded. The Greek 10-year yield stands at 3.65%, compared to 4.1% for the Italian 10-year, 3.1% for the Portuguese and 3.4% for the Spanish.
As mentioned by the BoE, the direct benefit from an upgrade of the Greek State to the investment category will be significant in terms of reducing the volatility of returns, but will probably be limited in terms of the level of borrowing costs, as the improvement in borrowing costs appears already heavily discounted by the market.
Nevertheless, as the upgrade of the Greek economy is expected to lead to improved liquidity for Greek bonds due to the expansion of the pool of investors, there may be a further decline in yields after the upgrade is achieved.
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