DZ Bank: Greece is getting closer to the investment level – Greek bonds will soon ‘shine’

Of Eleftheria Kourtali

Following the DBRS in March, S&P also downgraded its rating one notch below the BB + investment threshold, with the main reasons for this move being the manageable impact of the war in Ukraine, the reduction of non-performing loans and further fiscal consolidation, as noted by DZ Bank.

The prospect of achieving investment grade, as he emphasizes, offers significant opportunities to reduce the spread of Greek bonds and estimates that they will soon outperform Italian bonds.

DZ Bank in a recent report had predicted this upgrade from S&P, with the company following DBRS, which had already placed Greece in BB (high) with a stable outlook at the end of March.

Thus, Athens has already been rated only one step below the investment grade (IG) by two rating agencies. This is good news for the country, notes DZ Bank: in recent years but also lately, the Greek government has relied on a series of measures that are part of an overall strategy.

The country’s ambitious goal is to return at least partially to IG status in 2023. With the latest upgrade by S&P, another step has been taken towards this goal.

Despite the adversity, there are many positives

As DZ Bank points out, S&P justifies the upgrade primarily with the manageable effects of the Ukraine war on the Greek economy, the significant successes in reducing non-performing loans and the satisfactory implementation of structural reforms and fiscal consolidation.

For the economy, S&P notes that it should grow by only 3.4% this year. Overall, however, as DZ Bank points out, it concludes that the “indirect financial effects” of the war are limited and that they are financially manageable within the next three years – also with the support of the Recovery Fund.

The next important point is the significant improvement in the quality of assets in the banking sector. According to S&P, the ratio of non-performing loans to total loans has fallen sharply from 31% in 2020 to 12.8% in 2021. These improvements facilitate the transmission of the ECB ‘s still expanding monetary policy.

Last but not least, S&P confirms Greece’s steady progress in fiscal consolidation: this year, the withdrawal of the pandemic fiscal measures is expected to favor a reduction in the budget deficit to 4.3% of GDP. Next year, Greece is expected to record primary surpluses again. Overall, the debt ratio could continue to decline steadily, the German bank said.

Regarding Greek bonds, DZ Bank notes that the S&P upgrade did not have a positive effect on yields and spreads. This is due to the intense uncertainty prevailing in the market due to the new, extensive lockdown measures in China.

Nevertheless, DZ Bank expects that investors will assess the prospect of recovery of the investment grade from Greece in the coming months. In her view, this is also justified, as Athens’ plans to return to this milestone by 2023 are quite realistic. Therefore, it reiterates its expectation that Greek spreads will decrease and Greek bonds will outperform significantly compared to Italian bonds in the medium term.

In case of an upgrade to IG, the spread on the 10-year Greek bond against the 10-year Italian is expected to be zeroed again, as DZ Bank concludes.