After Greece clambers back to investment grade, what lies ahead?
S&P confirmed last Friday most expectations and upgraded Greece by one notch to ‘BBB-‘ with stable outlook, closing an arduous cycle for the Greek economy that started at the end of 2009, in the wake of the debt crisis that engulfed the country for close to a decade.
Greece found itself in speculative territory in April 2010, when S&P downgraded it to ‘BB+’ with a negative outlook, just one month before signing the first EU-IMF programme. The GGB rating was at A in January 2009.
The rating went as low as Selective Default in February 2012, when the debt haircut on some 200 billion euros of privately held debt, known as the PSI, was announced. Fitch and Moody’s had also placed Greece in the default category during that period.
Greece’s rating had been steadily improving since, until the first half of 2015 when the speculative approach of the SYRIZA government in its negotiations with Greece’s lenders led to four downgrades in quick succession, bringing Greece to ‘CCC-‘ with a negative outlook.
When the SYRIZA government started implementing the third adjustment programme that it ended up signing, GGBs had five upgrades from S&P, handing over a rating of ‘BB-‘ with positive outlook by October 2019, just a few months after New Democracy took office.
Since then, with the prospects taking a severe impact from the global pandemic, Greece got three further upgrades from S&P first in April 2021, a year later in April 2022 and just last week to investment grade.
There were three main factors contributing to Greece leaving behind the speculative territory for its sovereign debt, as had been noted by rating agencies in their regular review cycles over the years.
Greece needed to stick to its fiscal commitments that are designed to bring debt onto a sustained downward trajectory, fix the issues on the banks’ balance sheets, while the presence of the significant cash buffer that the SYRIZA government had secured in the volume of 35 billion euros brought comfort to markets and rating agencies.
Taking into consideration the tribulations of the SYRIZA government in H1 2015, it came as a surprise to most that, for the rest of its term, the Tsipras administration showed fiscal responsibility. It managed to beat its fiscal targets in most years in office, as the economy was beginning to pick up pace, and completed the programme it signed in the summer of 2018. In the process, it became the first Greek government during the crisis that achieved such an objective.
Being fully aware of the significance of fiscal commitments and leveraging the benefits of the eurozone putting in place the escape clause for fiscal matters in response to the COVID pandemic, the New Democracy government maximized its spending when it was allowed and stuck to the task of fiscal discipline when it was required.
With inflation and a booming economy in the post-pandemic rebound the New Democracy government managed to deliver on the country’s fiscal pledges, with a fiscal goal of a primary surplus above 2 pct of GDP in the draft budget for next year.
Greece has to deliver on this goal for decades to come and it has been argued by some, even S&P in its recent upgrade, that this tight fiscal path could cause social and political complexities as the space for expansionary policies is narrow.
The New Democracy government also leveraged the low interest rate policy environment and the ECB purchasing GGBs as part of the COVID emergency programme PEPP and funded most of its spending via debt. It kept the cash buffer near the 35-billion-euro mark, giving markets the reassurance that even if times get rocky in the markets, Greece is fully funded for up to three years.
Both SYRIZA and New Democracy took steps to help banks sort out their balance sheet issues. The former shaped the distressed debt market regulation that allowed banks to sell packages of bad loans to funds, while New Democracy followed with the Hercules APS that allowed the lenders to package and securitise bad assets with state guarantees.
All actions paid off and now banks have dropped their NPE ratio to below 6 pct, when back in 2015 nearly half of the loans on the banks’ books were not performing.
Even if the extent of the benefits from the upgrade to investment grade by one of the three leading agencies could be debated, it is beyond doubt that there is a huge benefit from Greece not being seen as an exceptional case, but more of a normal one.
Also, with one more investment grade from Fitch or Moody’s, Greece will be included in several bond indices that many passive funds must consider or even strictly follow in fund allocation. The PDMA estimates that this virtuous cycle could bring demand of up to 7 billion euros for Greek government bonds.
According to the latest data, Greece has 87 billion euros in bonds and 11.8 billion euros in short-term T-Bills. In the coming years the authorities will need to turn to the market to refinance more than 234 billion euros of adjustment programme loans that Greece has just started repaying.
The high rates policy environment for the last 12 months showed that GGB yields can push up the interest expenditure bill to levels not previously expected. Up to September of this year, Greece had to pay 2 billion euros more in interest. A steady positive assessment by rating agencies in the grade category will ensure less turbulence on the yield front.