Obstacles to investment grade

Obstacles to investment grade

Greece’s recent market foray and the yields of Greek sovereign bonds, with the 10-year note topping 3% against 0.53% last August, highlight how hard borrowing conditions have become. That is not only due to the impact of the energy and inflation shock, but also to the change of course by the European Central Bank, which is heading to the end of the quantitative easing in the summer and the first interest rate hike.

In that context Greece continues to have some grounds of support, such as its high cash reserves, the ECB reinvestment programs, the favorable profile of its debt and the strategic moves to improve its sustainability; however, analysts warn that the soaring of borrowing costs at those levels is also raising obstacles on the way to investment grade and limits the chances of reducing the debt-to-gross domestic product ratio.

ING strategy analyst Antoine Bouvet explains to Kathimerini that Greek bonds are in a sense affected by a series of factors: Yields are generally on the rise as central banks fight inflation, so investors would not increase their bond exposure; Greece is also a country that is significantly affected when the risk appetite weakens; if one adds the fact the European Central Bank has to stop its net quantitative easing (QE) purchases early, it is obvious why issuers such as Greece face higher interest rates.

At least, Bouvet adds, Frankfurt has pledged to continue considering Greek bonds as eligible for collateral.

Scope Ratings Director Dennis Shen appears more concerned: He says the high yield of the benchmark 10-year bond is a limitation for Greece’s course toward regaining investment grade, as it further weakens its market access terms, undermining the debt index’s reduction pace.

He notes that Scope has slashed its Greek growth forecast for 2022 by 0.9 percentage points to 3.4% and for 2023 by 0.2 percentage points to 2.3% due to the Russian invasion of Ukraine and the consequences on inflation and household purchasing power.

The rating agency also raised its projections on the fiscal deficit to 5.2% of GDP for this year and 3.4% in 2023.

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