On Monday June 25th, the credit rating agency (CRA) Standard & Poor’s (S&P) upgraded the long-term debt rating for Greece to B+ from B with a stable outlook. The CRA underlined that the debt relief announced by the Greek’s Eurozone creditors on Thursday June 21st and the country’s cash buffers “significantly” reduced debt servicing risks over the next years. This upgrade comes after a succession of upgrades since Athens was on the verge of default in June 2015 (S&P downgraded Greece debt rating to CCC- with a negative outlook on June 29th, one notch before default). Since then, the Greek rating has steadily improved, notch by notch, to reach B+.
Regarding last week’s deal, the Eurozone ministers agreed to extend maturities by 10 years on significant parts of Greece’s total debt obligations, with public debt peaking at around 180% of GDP. They also agreed to disburse EUR 15 billion to improve the country’s safety cushion to face its next financial commitments. The CRA said the maturity extensions and the sizeable cash buffer would cover Greece’s debt payments through 2021 and “partly cover repayments coming due in 2022”, significantly reducing refinancing risks. However, S&P warned that “public and private debt remains high and the authorities’ track record on attracting foreign direct investment is weak”. The country’s eight-year crisis toppled four governments and shrank the economy by 25%. Unemployment soared and still hovers over 20%, sending thousands of young educated Greeks abroad. The CRA said it was important for the country to resist rollback of economic reforms and continue with additional measures “to restore economic health and confidence in the banking sector as well as to attract foreign capital inflows to finance growth”.
Beyond Ratings sovereign risk scores vs. 10-year bond yield
Turning to Greece bond market, the 10-year bond yield plummeted by more than 1,000 bps since the country was on the verge of default at the end of June 2015. Three years later, this same bond yield stands at 4.1%, its lowest point since mid-May. In the chart above, we show that, in the Greek case, our sovereign risk aggregated score is well anti-correlated to the 10-year bond yield (c. -75%). This aggregated score also has the quality of clearly anticipating periods of stress on the bond market, as not only do the economic and financial fundamentals but also sustainability trends deteriorate a few quarters before the stress episodes. Over the recent period, even if the scores have slightly deteriorated, it seems that relative stability is at work. However, we see that the sustainability score, which is composed of environmental, social and governance determinants (ESG), is tendentially deteriorating. This deterioration is mainly due to the negative contribution of the governance factors: though the Greek government under the leadership of Prime Minister Aléxis Tsípras, has been stable since 2015, the regulatory quality, the rule of law and the government effectiveness have negatively contributed to the overall governance quality.
All in all, with this rating upgrade, the Greek tragedy seems to be coming to an end, at least for a few years. However, with a public debt that has reached close to double the annual economic output, it will be difficult for the country to restore sufficient room for maneuver to avoid new periods of stress within 3 to 4 years.
To be continued…
Julien Moussavi, Head of Economic Research – Source: Beyond Ratings