Markets react well to poll result as EU issues fiscal reminder


New Democracy’s landslide win on Sunday was welcomed by investors and key stakeholders, which is in line with the broadly good relationship that the government had built during its term with several market participants.

The Athens Stock Exchange had a buoyant week, with a solid rise of close to 6 pct, contributing to a six-month return of more than 31 pct and above 37 pct in the last 12 months.

The 10-year benchmark also had a strong week, with the yield falling below 4 pct in the aftermath of the national polls, in fact widening the distance from the Italian equivalent benchmark to 50 basis points, currently trading at 4.4 pct.

The spread from the German Bund was down to 145 basis points, near the all-time lows.

Rating agencies also gave their thumbs up to the elections outcome, with positive assessments mostly stemming from the fact that the result sets the platform for a majority win for New Democracy and as such policy predictability and continuity.

Moody’s and DBRS hinted that should Greece continue showing fiscal prudence and reforms do not stall, then the investment grade will be a formality once the new government is sworn in and the next review cycle starts in autumn.

Moody’s also said in a report that on its current declining path, Greek debt is more sustainable than Italy’s and by 2026 it could be at 135.2 pct, against 140.4 pct for Italy. It should be noted that in 2020, when the economy collapsed due to Covid, the debt-to-GDP ratio was well over 200 pct of GDP.

Some went as far as suggesting that Fitch, which is due to release its opinion on June 9, could be the first agency that will push Greece up to investment grade, even though the country would be going through another election campaign.

It was not just smooth sailing this week, as the European Commission published two reports, one with the spring recommendations to member states and the second post-enhanced surveillance report.

The content should not have comes as a surprise because growth and fiscal assumptions for the coming period have been repeatedly published by Brussels and it is a given that the fiscal path will be tighter, absent the benefits that were enjoyed through the activation of the escape clause to deal with the pandemic, and then the energy crisis. 

Greece will have to deliver a primary surplus of more than 2 pct of GDP up to 2060 to be able to enjoy the market comfort about its debt sustainability, starting with 2.5 pct of GDP next year.

The spring recommendations also highlight the challenges faced by the Greek economy and the policy suggestions to address them. 

Greece is facing a low investment rate, productivity remains low, and the gap has widened in the last decade, there are significant social challenges despite improvements in living and working conditions, regional disparities are significant and although there is gradual progress there is still work to be done for a sustainable development model.

The policy suggestions include the broadening of the tax base, focus on efficiency of the public sector, improve healthcare and long-term care spending, remain vigilant in NPE reduction, further improve the business environment, help the young people and women with labour market activation policies and strong social policies, reduce fossil fuel dependency and enhance the skill base for the green transition.