In a year when the news about credit ratings assigned by all the main agencies has been negative, Greece on Friday became the only country among the 11 main eurozone economies to get a rating upgrade amid the pandemic, courtesy of Moody’s. This in itself constituted a strong message for the Greek economy, analysts tell Kathimerini, and sent Greek bond yields to new historic lows on Monday.
Danske Markets Chief Analyst Jens Peter Sorensen says that was definitely a surprise and explains that ”the upgrade was a combination of the economic reforms, economic support from the recovery fund and low funding rates and despite the negative impact from Covid-19. Furthermore, I do not think the markets realize how much cash the Greek government has – the 37 billion euros and with the grants from the recovery fund – then there are lots of cash backing Greece.”
Antoine Bouvet, Senior Rates Strategist at ING Global Markets Research, says that “in terms of market reaction, lower yields make sense. Provided Greece continues to benefit from ECB purchases, yields can continue to fall. The upgrade came with a praise for Greece’s reform effort and with positive growth forecasts which is encouraging. The ever lower financing cost and EU support were also playing a role in the decision in my view.”
Ioannis Sokos, Director, Fixed Income Research at Deutsche Bank agrees this was a surprise upgrade by Moody’s. “The main reason is that during Covid we have predominantly seen negative rating actions for eurozone countries by most rating agencies. The only exception has been an upgrade of Slovenia, and an improvement in the outlook of Italy back to stable. Hence, this is only the second upgrade during Covid, amid many negative rating actions.”
“When you read the Moody’s report it is apparent that the strong support by the EU recovery fund was one of the main reasons for the improvement in Greece’s rating. However, Moody’s also mentioned some more Greece-specific factors that played a key role in its decision to upgrade Greece, like for example the improvement in institutional strength & ongoing reforms, as well as the very favorable debt structure that we’ve also highlighted many times,” adds Sokos.
“Nevertheless, I should mention that this has been what we call a ‘catch-up’ upgrade, meaning that Moody’s had a lower rating for Greece versus the other three main rating agencies. After this upgrade, Moody’s is aligned with S&P, and it is still one notch below Fitch’s BB rating. Given the bulk of negative rating actions during Covid, this upgrade implies that it was targeted, and that somehow the situation in Greece is helped disproportionately by the ongoing reforms and strong EU support vs other countries. The good thing is that Greece remains on an upgrade-trajectory, and we have not yet seen any reversal of previous positive rating actions,” he notes.
He goes on to argue that “the Covid crisis might delay the path to investment-grade (IG) as we’ve seen both Fitch and S&P lowering the outlook of Greece from positive to stable earlier this year due to Covid. The fact that Greek bonds are PEPP-eligible is neutralizing the damage of not having an investment-grade rating at this stage, but if the ECB was to transition from PEPP to APP then this could become a problem. In other words, PEPP is giving Greece time to become IG but Covid is delaying that. What’s left to be seen is what the credit rating of Greece will be when PEPP is no longer in place, and APP becomes the main ECB policy instrument,” he concludes.