Investment grade’s impact
The upgrade of Greece to investment grade by DBRS Morningstar has significant, albeit limited, “practical” benefits, however, in symbolic terms it is certainly a much stronger catalyst that portends multiple positive developments for the Greek economy, businesses and households, while marking the end of a harsh and painful cycle.
Although the upgrade came at a difficult time for the country, following the devastating floods, the recovery of “investibility” after almost 13 years, in which the Greece experienced bankruptcy, the significant contraction of the economy, bailouts, capital controls, bank closures, the Grexit threat, businesses closures and the “brain drain,” it is an important development.
Most states facing bankruptcy never approach investment grade. DBRS acknowledged the significant change of course Greece has made, citing an “impressive track record” that ensures responsible fiscal policy is pursued and public debt reduction continues. As the European Stability Mechanism (ESM) stated, Greece achieved this milestone “thanks to the remarkable efforts of its governments and people. Advancing the national recovery plan, investing and staying on a prudent fiscal path will bolster success and market confidence.”
DBRS is one of the four rating agencies the European Central Bank recognizes in Eurosystem operations (a single investment grade rating is sufficient). So, this upgrade in practice is important mainly for Greek banks, as it means that the value of Greek bonds they deposit as collateral for refinancing operations will not receive a bigger haircut than is the case for other countries’ bonds. According to estimates, haircuts on Greek bonds will decrease by 40% on average. This means Greek banks with the same collateral will draw more funds from the ECB.
Greek bonds will also receive support, as they will henceforth be eligible for any future programs of the ECB, without depending on the provision of a waiver. The upgrade also gives an increased number of funds the opportunity to consider investing in Greece.
Most important, however, when it comes to the upgrade, is the improvement in psychology: the expectations it creates and the signals it sends. Now the markets will focus on the actions of the other agencies.
