Alpha Bank: The big picture of the Greek bond market – The positive catalysts despite the increase in spreads

The Greek government bond market, as well as that of corporations, is of interest to investors with the expectation of recovery of the investment grade, the synergies from the Recovery Fund and the general recovery of the Greek economy, as noted by the management portfolio of Alpha Bank in today’s report, emphasizing that the possibility of upgrading the Greek economy is expected to strengthen the interest in Greek securities.

More specifically, as noted by Alpha Bank, Greece seeks after about 13 years to regain the status of investment grade. It is two notches for S&P and Fitch and three for Moody’s. Even in the pandemic crisis, the Greek economy showed resilience and upgraded. According to Fitch and S&P, its prospects are positive, while Moody’s rates are stable.

It is noted that the debt service costs (debt maturity and interest) in terms of revenue are lower in 2022 in Greece (25%) compared to Italy (BBB) ​​and Spain (A-), which strengthens the likelihood of upgrading.

In case the growth rates of the Greek economy meet the forecasts of international companies for the next five years in combination with other factors, Greece is expected to regain the level of investment grade. If it succeeds, the yield on the 10-year bond is expected to escalate, approaching the area where the respective yields of Cyprus and Italy are formed.

The Greek spread against Germany is currently at 243 bp. and higher than the spring of 2020. Although the increase in credit margins usually reflects an adverse change in country risk, however, as Alpha Bank points out, in the current context the role of limited liquidity seems to play a more important role. Added to the persistent inflation environment are geopolitical concerns that favor a shift to investment shelters, such as German bonds, further widening their gap with Greek yields.

However, Greek bonds have many positive catalysts. Public debt dynamics have improved significantly in recent years, according to Alpha Bank’s analysis, due to the significant reduction in average service costs and the large average maturity. The ECB’s announcement in December 2021 that Greek bond markets will continue during the PEPP bond reinvestment period demonstrates its intention to continue supporting Greek bonds beyond March 2022. Despite its estimated increase average borrowing costs, debt sustainability is not expected to be burdened.

The amount of public debt (excluding repos) amounts to around € 355 billion. At the same time, most of the debt consists of EFSF and ESM loans (approximately € 190 billion), while the rest of the IMF loans (€ 1.7 billion) are expected to be repaid by in March 2022. In addition, the amount of cash (around € 30 billion) is sufficient to cover debt maturities and interest expense in 2022 and 2023.

Yields at the end of the ten-year bonds of the Eurozone countries show a clear correlation with the fiscal figures, as Alpha Bank observes. Germany with the lowest budget deficit as a percentage of GDP and low public debt to GDP enjoys the benefits of lower returns. He also notes that the debt-to-GDP ratio alone is not an aggravating factor in increasing returns. Spain and Portugal with a ratio of over 100%, in the decade borrow at interest rates close to 1%. The average debt maturity and the average lending rate, in which Greece shows an improved picture, also play an important role.