Market: Greece now borrows cheaper on the markets than the United States

(BFM Bourse) – On the secondary market, the yield on the 10-year bond of the Greek country fell to around 4.13% while, on the same maturity, the rate on the American Treasury bond is close to 5% . Athens was able to implement reforms and measures which enabled it to restore its public finances.

As painful and bitter as they may have been for the Greek people, the austerity cure and the reforms undertaken by Athens over the past fifteen years (admittedly coupled with a strong post-Covid economic rebound) have produced their effects.

To the point that Greek debt is one of the few to see its value increase. On the secondary market, the 10-year yield on Greek sovereign debt now stands at 4.13%

against 4.64% in January. The value of bonds moving in the opposite direction to their yield, Greek debt therefore appreciated over the whole year, despite rate increases by the European Central Bank. We have no other examples in mind in the euro zone…

From now on, the return demanded by investors on the market is lower than for the United States. The 10-year American bond rate is currently not far from 5%.

“As we know, the rise in rates was the strongest in the United States, reflecting the resilience of the American economy, also explained by the deterioration of the public deficit, and the avalanche of government securities issues” , explained Sebastian Paris Horvitz of LBPAM at the beginning of the week. According to Bloomberg, the costs paid by the American state to honor both the interest and the nominal amounts of its loans totaled $652 billion over the nine months from October 2022 to the end of June 2023.

That said, we took the United States for the symbol, but Italy (4.86%) and the United Kingdom (4.61%) also display yields on their 10-year securities higher than those of the Greece.

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“The pleasant surprise of the euro zone”

The efforts undertaken by Athens have not gone unnoticed. “Greece has undoubtedly been the pleasant surprise of the euro zone in recent years and the short-term outlook seems good,” noted Capital Economics in May.

The most significant satisfaction came from S&P. Greece saw its credit rating raised last week to “BBB-” by the rating agency, thus returning after more than ten years to an “investment grade” rating. as opposed to “junk” the other category. As Bloomberg notes, other less known agencies (Scope ratings, DBRS) had already removed Greece from this “junk” category. But S&P is the first of the “Big Three” to have made this move.

If Greece still had a colossal debt rate last year of almost 180% of GDP, according to the Federal Reserve of Saint-Louis, the trajectory remains impressive, since this rate rose to 212% in 2022 and more than 200% in 2021. And S&P anticipates a ratio of 146% this year.

“We believe that the government will achieve a primary surplus (the budgetary balance excluding debt costs, Editor’s note) of at least 1.2% of GDP this year, exceeding its target of 0.7%, even taking into account the cost significant budget linked to recent forest fires and floods. We forecast an average primary budget surplus of 2.3% of GDP over the period 2024-2026”, develops the rating agency.

A healthier banking sector

Several factors explain the return of the country’s sanctity to markets and agencies. To take the most recent, the general elections last spring raised some concerns. But the conservative New Democracy party of Prime Minister Kyriakos Mitsotakis won an absolute majority in Vouli, the only chamber of Parliament (158 seats out of 300, according to Politico) in June.

Greece also experienced a very rapid post-Covid recovery (+8.4% in 2020, +5.9% in 2021 and +2.5% in 2022, according to the IMF). “Real GDP returned to its 2019 levels in the third quarter of 2021 and now exceeds them by around 6%,” Barclays noted in May.

“This partly reflects the enormous room for maneuver Greece has to recover from the global financial crisis and the eurozone crisis, since its GDP is still 20% lower than in the first quarter of 2008 “, puts Capital Economics (a little) into perspective.

The growth in tourism has obviously contributed to this renewed activity. According to several media, visits by foreign tourists amounted to 17.4 million over the first eight months of the year, or 11% more than over the same period of 2019.

But Athens has also implemented important structural reforms. “For example, the share of non-performing bank loans (bad debts which risk not being honored, editor’s note) has decreased, tax rates have been reduced, business confidence has improved (partly thanks to digitalization) and public finances are more stable”, lists Capital Economics.

Concerning the rate of bad debts in bank loans, it is more precisely below 5% currently compared to 30% in 2020, according to the European Banking Authority, cited by Moody’s. This vital clean-up was made possible by a mechanism called “Hercules” to remove toxic assets from banks’ balance sheets via a state-guaranteed debt securitization scheme.

The best yet to come?

S&P notes for its part that from 2019 – a year after Greece’s return to the debt market – direct investments abroad have resumed, while business confidence has recovered, driven by reforms on the labor market, competition and compliance with taxation. This after years (from 2009 to 2015, according to the agency) of economic depression during which successive governments reduced spending on health, education as well as those linked to infrastructure.

“The emergence from the debt crisis and then the Covid-19 pandemic has galvanized the nascent recovery of investment and confidence in the economy. The rapid digitalization of public services has enabled considerable progress to be made in the reduction of tax evasion and other efficiency gains within the public sector”, develops S&P.

“The good performance of tourism, shipping and manufacturing in recent years, as well as the progress made by banks in selling and resolving their exposure (to non-performing assets), has further boosted the “investment”, adds the agency.

The best may be yet to come for Greece. After S&P, Fitch must deliver its verdict in early December. The American agency rates Greece at “BB+”, the last step before the “investment grade” category. Moody’s, for its part, has been at “Ba1” since September, again the last step before an investment grade rating from the agency.

The example of Portugal

Barclays noted in May that if two of the three agencies assigned an investment grade rating to Greece, it could find itself eligible in the bond indices linked to these ratings in the euro zone of Bloomberg and the London Stock Exchange.

The bank cites the example of Portugal. After being raised in this category by S&P in September 2017, the Portuguese-speaking country reduced its 10-year spread (rate difference) by 40 points (0.4%) on a basis with Spain. Then by 10 more basis points when Fitch followed, three months later.

“Importantly, the spread has narrowed further by around 40 basis points in the interim, which we believe likely indicates that markets have priced in inclusion into the indices,” Barclays adds. . The bank believes that Greece may experience a similar fate.