Societe Generale: “Window” for investment grade before the elections for Greece
Greece is not one step away from investment grade, French bank Societe Generale explains, as there is a chance that rating agency S&P could surprise markets by upgrading Greece to investment grade on April 21, even before the country’s elections.
The French house continues to recommend buying 10-year Greek bonds (GGB) over Italian bonds (BTP) with a target of -10 basis points from around 17 basis points which is the current spread.
GGBs continue to offer a good risk reward as SG anticipates an upgrade in debt ratings for Greece and political risks in Italy. The 10-year GGB-BTP spread has narrowed largely due to the ECB’s quantitative easing (QT), which will affect BTPs more than GGBs, as GGBs are not included in the quantitative easing program (PSPP). Fitch will review Greece’s rating on January 27, which it was expected to upgrade to stable BB+.
“While there is uncertainty surrounding Greece, the economic outlook due to the energy crisis and the pace of upgrades has slowed, we still believe Greece is on track to regain investment grade (IG) status in 2023,” notes SG. Greece will continue fiscal consolidation and should record fiscal advantages from 2023 and 2026 and Greece’s ratio to GDP will decrease to 147% and converge with Italy by 2027.
Strong foreign direct investment inflows have underpinned Greece’s economic recovery, while funds from the EU’s NGEU program will further boost economic growth.
“While Greece’s debt-to-GDP ratio is still higher at 195%, 75% of total debt consists of low-cost loans, including from Eurosystem institutions. Outperformance and high inflation significantly reduce debt. In addition, the banking sector was boosted by the government’s ‘Hercules’ securitization programme, which helped banks reduce their government-guaranteed non-performing loans (NPLs). Despite the risk of an EU-wide recession, Greece appears to be continuing to grow and we expect it to regain investment grade (IG) soon,” the bank predicts.
“The investment grade in Greek bonds will allow them to enter important bond benchmarks, which are followed by many investment funds. Many bond benchmarks require at least two IG ratings or an above-average IG rating to be selected. Markets already reacted when the first rating agency upgraded Portugal to IG and we believe this could happen to Greek bonds in mid-2023, albeit with less impact as Greek bond pricing is currently “rich”. Greek bond yields tend to be more volatile than Italian yields and a downturn in European market sentiment would likely hurt Greek bonds more than Italian bonds,” the French bank explained.
Read also:
Capital Economics: What is changing in Europe since the drop in natural gas prices