Piraeus Bank: The markets for Greek bonds show an investment level

According to an analysis conducted by Piraeus Bank, the markets show (and invoice) the markets in the credit rating of Greek bonds.

According to the bank, the assessment of the creditworthiness of bond issues by international rating agencies (mainly Moody’s, S&P and Fitch) and especially their placement in the investment grade or not, is one of the main factors that affect the cost but and the ease with which financing needs can be met at both corporate and government levels.

However, especially with regard to government bonds, the credit rating does not arise mechanistically through the algorithmic processing of a defined set of variables. Instead it is determined by a grid of quantitative and qualitative criteria, which are filtered and weighed through committees of experienced and specialized executives of rating agencies. It is therefore understood that such a process of combining all these factors will be by design slow-moving, conservative and with a significant lag in the timing of its actions. As a result, the decisions of the rating agencies, most of the time, come to “seal” with their validity and to give a vote of confidence in developments and events that the markets have already discounted.

So we try to use this “discounting” ability of the markets in the present analysis, in order to form a precursor to the way Greek government bonds are valued by the markets and indirectly to “predict” future decisions of the rating agencies regarding the debt of the Hellenic Republic.

One market that aims to invoice the level of government (as well as corporate bonds) credit rating and reflect these changes is the Credit Default Swap (CDS) market.

Using data on CDS government bond prices for the period 1 quarter 2004 to 3rd quarter 2021 for 60 country bonds we estimate a statistical model that allows us to “translate” CDS prices, as recorded in Bloomberg, into “imputed “credit rating levels.

The main conclusions are summarized in the following two diagrams:

In the first diagram we present the evolution over time of the rating of the debt of the Hellenic Republic according to the international credit rating agencies (Moody’s, S&P and Fitch) against the credit rating as it is “presumed” by our statistical model and the prices of the Greek CDS bonds. This chart shows the most immediate opportunity for the CDS market to integrate and reflect current developments in both the downward (2008-2011) and upward (2017-present) phases of the cycle.

At the same time, the significant degree of conservatism that governs the rating agencies is recorded as the CDS markets price the Greek risk premiums at investment level levels, while the rating of the companies lags significantly behind this very essential milestone.

In the second diagram we present a comparison between the imputed credit rating levels of Greece, Spain, Portugal and Italy. From this diagram emerges the significant upgrade of the course of Portugal which while in 2011 showed behavior similar to Greece, slowly but gradually differs significantly and today is evaluated similarly to Spain. It is estimated that Italy is following the opposite course, which is now behind Spain and Portugal, following a course similar to that of Greece.