Greece Has Already Gained Investment Grade, Analysts Say

Bank analysts have told Reuters that Greek bonds are currently being traded as if Greece has already regained investment-grade status.

The New Democracy Party emerged as the winner in Sunday's election, although it fell short of an outright majority. However, investors are hopeful that the party will remain in power after a repeat vote in June and continue implementing reforms, which would pave the way for Greece to reclaim its credit ratings.

The analysts note that Greek bonds are already trading like investment-grade paper, and there has been a sharp drop in borrowing costs this week. Greek 10-year bond yields, which currently stand at around 3.9%, are now trading approximately 50 basis points below Italy's yields. This is notable because Italy holds investment-grade credit ratings from three major ratings agencies. Since the election result, Greek 10-year bond yields have fallen by nearly 15 basis points, and the spread over German bonds, which reflects the risk premium, is at its lowest level since 2021.

Greece has made significant progress since the conclusion of its bailout program in 2018. The country has regained market access, reduced its record public debt, and is expected to outpace the European Union average in terms of growth this year and next. Reaching investment-grade status would have significant implications for Greece. It would make Greek debt eligible for government bond indexes, attracting steady demand from a larger pool of global investors.

However, analysts caution that the anticipated upgrade, likely from S&P Global Ratings in October, is already priced into the market. Therefore, they do not expect a sharp reduction in Greek bond yield spreads compared to German bonds. Jean-Christophe Machado, rates strategist at BNP Paribas, predicts a spread of 125 to 180 basis points over Germany once Greece achieves an investment-grade rating and is included in indexes, only slightly lower than the current spread of around 140 basis points.

Societe Generale rates strategist Sean Kou agrees with this view, drawing parallels with Portugal's experience in 2017. Kou suggests that the expected upgrade is already widely expected, which limits the potential for a significant rally in Greek bonds. Christoph Rieger, head of rates and credit research at Commerzbank, adds that while official inclusion in indexes may attract index buyers, there could also be selling pressure from fast money investors, such as hedge funds, that had previously bought Greek debt in anticipation of this development.

By fLEXI tEAM