Analysis: Greek Bonds Set to Shine as Elections Could Pave Way to Investment-Grade Status

A resounding victory in Greece’s elections for the incumbent Prime Minister Kyriakos Mitsotakis and his conservative New Democracy party could prove a milestone for the country’s credit rating to be upgraded to investment-grade status later this year, analysts say.

This should be a further boon for Greek bonds, allowing their yields to continue recent sharp falls.

“The Mitsotakis government has transformed Greece into the star performer among the major euro members,” Holger Schmieding, economist at Berenberg, said in a note.

With almost all votes from Sunday’s election counted, New Democracy won 40.6% of the vote, enough to secure an outright parliamentary majority under a new voting system.

“Signs for a stable Mitsotakis government are likely seen positively by rating agencies, further boosting investment grade hopes,” Rainer Guntermann, rates strategist at Commerzbank, wrote in a note.

Greece’s borrowing costs have fallen significantly as a result of the country’s recent economic reforms and improvements, despite the prospect of further interest-rate rises by the European Central Bank. In recent months they have dropped below those of Italy.

An upgrade to investment grade would allow the country’s bonds to be included in key investment-grade bond indexes, attracting new pools of investors.

Analysts expect that the prospect of political stability combined with continued economic improvement should boost Greek bonds further, sending yields lower.

Ten-year Greek government bond yields recently traded at 3.438%, a steep fall from levels above 5% in October last year, according to Tradeweb.

Falls in Greek bond yields have sent the spread between Greek 10-year bonds and their German equivalents tumbling to about 109 basis points, from above 200 basis points as recently as mid-March.

Although the key credit-ratings reviews for Greece aren’t due until the fourth quarter, Greek bonds could advance from now as “the market is likely to price them ahead of the event,” Aman Bansal, rates strategist at Citi wrote in a recent note.

Both Fitch Ratings and S&P Global Ratings rate Greece at BB+, one notch below investment grade. Investment-grade ratings by at least two of the three major ratings firms would lead to inclusion in investment-grade indexes.

S&P upgraded its outlook on Greece to positive from stable on April 21. On June 9 Fitch affirmed a stable outlook albeit anticipating an improved fiscal stance and solid nominal growth.

S&P’s next review is on Oct. 20, while Fitch’s next review is on Dec. 1.

Moody’s Investors Service still rates Greece deeper in noninvestment grade at Ba3—three notches below the lowest investment-grade of Baa3—though it upgraded the outlook to positive from stable on March 17. Its next review is on Sept. 15.

But the results of Greece’s election—a second-round election after a vote on May 21 failed to result in an outright majority—aren’t just good news for Greece, Berenberg’s Schmieding said.

They give a note of optimism that Europe’s extremist political parties may not be as strong as previously feared, while reforms could propel peripheral eurozone countries—which faced crises a decade ago—into a source of growth and stability for the region, he said.

Write to Emese Bartha at [email protected]