The benefits of a debt upgrade
With investment grade, funds can legally invest, but anticipation has already helped bonds
It is widely expected that Greek debt will finally return to investment grade for the first time since 2010. Some minor credit rating agencies have already gone ahead with the upgrade, though none of the “big four” – DBRS, Fitch, Moody’s and Standard & Poor’s – have done so yet.
Greece is already enjoying some of the benefits of investment grade: it already borrows more cheaply than Croatia, Cyprus, Italy, Latvia, Lithuania, Malta, Slovakia and Slovenia, all of which have investment-grade debt. and its bond interest rate is approaching Spain’s, whose debt rating is four levels higher. It also borrows more cheaply than the UK and the US, but a direct comparison is a bit unfair, because other currencies are involved.
It’s partly the anticipation of a rating upgrade and appreciation for its political stability as evidenced by the recent successive elections. But Greece also benefits from a change in the way investors approach sovereign bonds.
When the eurozone’s sovereign debt crisis ended in the mid- to late 2010s, investors followed the rating hierarchy established by the ‘big four’ agencies. This order has been upset by the rise of geopolitical risk, technical issues such as the European Central Bank’s bond-buying schemes, the volume of available funds through the EU and the investors’ assessment of how each individual economy performs. Fiscal rectitude is much appreciated and often overrides the rating agencies’ assessments. Investors often make comparisons in pairs: thus, Portugal’s bond interest rates are lower than Spain’s, whose rating is higher; likewise, Greece’s rates are lower than Italy’s. In the case of Greece, its debt also has a better profile because it has a longer maturity and its servicing is cheaper.
So, what additional benefits could an upgrade to investment ratings bring Greece? Bank of Greece Governor Yannis Stournaras has said that the vast majority of investment funds, maybe 90%, cannot invest in countries whose debt is below investment grade. Thus, an upgrade could make these investments possible, including on the Athens Stock Exchange, where analysts estimate that foreign investment could more than double. New investments mean more jobs and stronger growth.
