Moody's maintains Ba1 rating for Greece, one step below investment grade
According to the rating agency, the challenges for the Greek economy include a big current accounts deficit, while the size of the tourism and shipping sectors make the economy vulnerable to external shocks and any improvements to economic resilience by expanding the export base will take time.
A continuation of economic policies and commitment to fiscal consolidation combined with the successful implementation of the remaining reforms, especially to the judicial system, which will lead to greater resilience to external shocks and a faster improvement in fiscal strength and processing of NPLs than in Moody's baseline scenario would support a higher rating, Moody's said. Further improvements in the banking sector, reducing profitability variation and bringing asset quality and capitalisation closer to the euro area average, would also be credit positive.
Factors leading to a rating downgrade would be a reversal of the economic policy of recent years or indications that the reforms of previous years are not producing the anticipated impetus to growth and the country's fiscal position, weighing on business sentiment and investment. A sustained, material deterioration of the government's fiscal position in combination with a sharp deterioration of the banking sector's health would trigger a negative rating action. An escalation in the geopolitical situation in Europe involving NATO would also likely lead to downward pressure on the rating.
Regarding the decision to keep the country's rating unchanged, Moody's said this was based on reforms that had led to visible improvements in the institutions and governance, stronger investments and a health banking sector. At the same time, it noted, the debt to GDP ratio remained very high, though this was offset by a favourable debt structuring and big cash buffer, while the Greek economy had successfully withstood the energy crisis, while significant funds from the European Union and private investments will support growth in the coming years.
In related news, the markets “rate” Greek bonds in the “A” category, 5 notches higher than their current average rating of “BBB-” that is in the lowest category of the investment grade, as the Bank of Greece pointed out on Friday.
As it states in a note on the Greek economy, Greece’s credit rating has followed an upward path for a long time, almost continuously since 2015, as a result of which it will regain investment grade in 2023 and now has an average rating of “BBB-“. .
According to the rating agencies’ reports, further upgrades of the Greek Government may result from the maintenance of strong economic performance, prudent fiscal policies, the continuation of structural reforms that strengthen the competitiveness of the Greek economy and the further reduction of the stock of nonperforming loans of Greek banks, approaching the EU average. It is worth noting that according to the 2023 results of the four systemic banks, the nonperforming exposures ratio stood at just 4.1% on average, from 6% in 2022.
According to the BoG’s calculation model, the markets, however, price Greek government bonds more favorably than the rating agencies. In particular, the market-implied rating for Greek bonds is within the range of the ‘A’ rating category, it points out. What is certain is that the yields of Greek government bonds move close to or lower than the yields of bond countries that have a much higher rating than Greece.
Greek bonds of all maturities have long had yields significantly (and permanently) lower than those of Italian bonds. For example, the spread of the Greek 10-year against the corresponding Italian one moves to -30 basis points and the 5-year to -32 bp.
At the same time, Greek bond yields are approaching or – in some durations – moving below those of Spanish bonds, which are rated by all rating agencies as “A”. The Greek 10-year yield stands at 3.24% and just 17 bp. higher than the Spanish 10-year bond, while in the 5- and 30-year maturities the Greek bonds have lower yields.
The Greek 5-year is yielding 2.88%, while the Spanish is at 2.91%, and the yield on the Greek 30-year is 3.73% compared to the Spanish 30-year’s 3.76%.
As the BoG notes, Greek bond yields have fallen over the past two weeks, in line with broader developments in eurozone government bonds, as investors’ expectations for a rate cut by the Fed and the ECB in June strengthened, following a downward trend revision of the ECB’s forecasts for inflation rates in the eurozone and the release of US data on inflation and wages.
