Greek Business File, January-February-March 2020, No 124

By Dimitris Kontogiannis

 

Greece is on the road to credit upgrades in 2020

 

It looks quite challenging, and perhaps a long shot, but 2020 could be the year Greece joins the club of countries with investment credit rating status. A host of factors from limited new debt issuance, sizeable cash reserves, the long maturity of Greek debt and fiscal discipline favor credit upgrades of one or more notches.

2019 was a great year for Greek government debt with bond yield falling to all-time record lows. The state easily covered its borrowing needs and the 10-year benchmark bond yield even dropped below its Italian counterpart at some point during the year. Assuming the ECB continues its accommodative monetary policy, the international debt markets do not experience increased volatility and geopolitics do not create havoc, Greek securities look set to capitalize on more credit upgrades and possibly join the investment grade league once again. The entry of local banks into the fray, following the expected SSM’s permission to let them buy Greek bonds in the first quarter of 2020 should also provide a boost.

Greece raised 9 billion euro in 2019 from selling government bonds with total bids reaching 43 billion euro and issue up to 8 billion in 2020. The bond yields were put on a sharp downwards trend, following the European parliament elections last May and the national elections in June. The 10-year bond yield hit an all-time low at 1.15 percent on October 15 and has spent most of its time between 1.30 and 1.50 percent since last December.

The bond market discounts credit upgrades for Greece while the most optimistic analysts do not rule out the possibility of a rating agency assigning an investment credit rating this year. Greece is rated “BB-“ with positive outlook by S&P since October 2019 while DBRS, a US- Canadian rating agency, assigns BB (low) with positive outlook since November 1, 2019. Fitch has assigned a “BB-“ rating with stable outlook since August 2018 and is expected to proceed with an upgrade in late January 2020. Moody’s has been the most conservative of the major rating agencies with B1 and stable outlook since March 1.

2020 funding strategy

The Public Debt Management Agency (PDMA) has unveiled its 2020 funding strategy, emphasizing the country’s continuous presence in the international debt markets, the reduction in the debt stock and the preservation of the current level of cash reserves. In so doing, it wants to lower funding costs, attract more real money investors and further improve a liquid yield curve.

Two financing scenarios

Thus, it considers two main financing scenarios, depending on the early repayment amount of T-bills and official sector debt but the final amounts will depend on the prevailing market conditions.

The outstanding stock of T-bills stands at around 13 billion euro at present while the outstanding loans owed to the IMF were around 5.4 billion euro at the beginning of 2020 after the early repayment of some 2.5 billion in 2019.

  • In the first funding scenario, Greece will reduce its T-bill stock and loans to the IMF and others by 4.4 billion euro while early debt repayments amounts to 7.4 billion euro in the second scenario.
  • In the first scenario, Greece will issue new medium and long-term bonds worth 4.0 billion euro and 8.0 billion in the second funding scenario. The public debt decrease is estimated at 3.3 billion euro in the first case and 2.3 billion in the second case.

In 2020, Greece has to pay around 3.0 billion euro for the amortization of medium and long-term bonds, more than 6.0 billion euro in interest on medium and long-term debt and more than 0.5 billion euro in other cash requirements.

The Greek authorities argued in their meeting with international investors that the public debt is sustainable although it exceeded 170 percent of GDP last year. According to the baseline assumptions of the European Institutions, the public debt ratio is expected to be on a sustained downward trend until 2060. In addition, 81 percent of the public debt stock is owned by the official sector, namely the ESM, EFSF, bilateral loans (GLF), IMF, EIB loans, ANFAs and SMP, meaning it enjoys low interest rates and a long-term maturity profile. And more than 90 percent of the debt is at fixed interest rate.

The baseline assumptions include an average effective rate of 3.7