Greece is back but the recovery is not over

Investment grade status awarded for the first time in 12 years

Greece has returned to investment grade status with a western credit rating agency for the first time in 12 years, culminating a rapid economic resurgence. But the hard work must not stop here. There is still plenty for Greece to do on its road back to normalisation.

On 4 August, Scope upgraded Greece to triple B- with a stable outlook, citing a favourable trajectory of government debt and banking sector reforms as well as stronger European institutional support as the main reasons for the upgrade.

It is a remarkable economic story. Just over a decade ago, Greece lost all of its investment grade credit ratings after being hit hard by the euro area debt crisis, in which it became the victim of the biggest sovereign default in history as it threatened to crash out of the euro area and the single currency. What made this astonishing is that this was an advanced economy in the West and not an emerging economy where defaults are more prone. Greece was subsequently left with no access to the capital markets and instead had to endure a series of austerity measures in line with the bailout loans it received.

But the recovery over the last decade has been impressive. Greece’s public debt has been steadily declining with its debt to gross domestic product ratio expected to fall to 160.7% this year, a decline of 46 percentage points from the 2020 peak, according to Scope. Greece’s banks have also made good progress in cleaning up their balance sheets of non-performing loans.

But perhaps most significantly, Greece has improved its relationship and reputation with the rest of Europe. This was evident during the Covid-19 pandemic when the European Central Bank stepped in to purchase Greek government bonds under its pandemic emergency purchase programme despite the country not meeting the ECB’s criteria due to its junk credit status. The ECB is continuing to buy Greek debt through reinvestments of PEPP until the end of 2024. Greece is also receiving support through the Next Generation EU scheme to help modernise the economy and tackle climate change.

Greece now has a resilient backstop through its European partners that was missing over the last 12 years. It is vital for any investment grade-rated sovereign to have the security that, if a crisis were to happen, it could fall back on strong institutional support.

An investment grade-rated sovereign must also have strong access to the capital markets and this is another area where Greece has impressed. Greece made its return to the capital markets in April 2014 and has since developed a full yield curve and a frequent presence in the markets. It achieved its first big milestone with a 10-year bond in March 2019 – a staple maturity of investment grade-rated European sovereign borrowers – before extending its curve to 15 years in 2020 and 30 years in 2021. Since 2020, Greece has also priced its syndicated transactions against mid-swaps rather than on a yield basis. The country has also bolstered its investor base with real-money accounts.

In response to an improved reputation with investors, Greek government bond yields have come down significantly, with the 10-year bond falling to 3.8% from the peaks of above 30% in 2011. In fact, Greece has been trading through Italy for much of this year and investors have been pricing in Greece as an investment grade-rated sovereign for some time. Greece’s 10-year spread to Germany has also fallen and is trading 50 basis points lower than Italy’s.

A further investment boost will come once Moody’s, S&P and Fitch follow Scope in upgrading Greece to investment grade status. This is crucial for inclusion to the major investment grade bond indices, which require at least two investment grade ratings from the big three credit rating agencies. This would give Greece access to a much wider pool of institutional investors. Many large investors also do not have mandates to buy sub-investment grade-rated bonds.

The other rating agencies are all expected to follow Scope. Both S&P and Fitch rate Greece just one notch below investment grade at double B+ with Moody’s rating Greece at Ba3. Meanwhile, DBRS Morningstar recently stated Greece was ‘on the threshold of an investment grade rating’. Upgrades by the big three as well as DBRS would also allow the ECB to accept Greek bonds as collateral as these agencies are recognised by the central bank, although Scope is also expected to be an officially ECB-recognised credit rating agency very soon. Japan’s Rating and Investment Information became the first rating agency to upgrade Greece to investment grade at the end of July.

But returning to investment grade status does not mean Greece can sit back. There are still inherent risks in the Greek economy that make it vulnerable to potential downgrades in the near future. Greece still has high government debt that needs to be addressed. There are also policy risks as the country moves towards more market-based financing and the banking sector remains fragile. Greece is back but it must not get carried away. The work is not over.

Burhan Khadbai is Head of Content, Sovereign Debt Institute, OMFIF.

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