Greece’s recovery of investment grade, which it had lost more than ten years ago during the Eurozone debt crisis, has been discounted by bond investors, Reuters reports in its analysis.

Greece, Reuters notes, has worked since the end of the bailout program in 2018 to regain favor with investors and the coveted investment grade that is a stamp of fiscal integrity.

Investors, he adds, hope that the New Democracy party – which was the clear winner in Sunday’s election although it did not secure independence – will remain in government after new elections in June and continue reforms, paving the way for recovery of investment grade.

Analysts at banks that deal in Greek bonds said that after borrowing costs fell sharply this week, Greek bonds were already trading as if they were investment grade.

Despite Italy having an investment grade rating from the big three credit rating agencies, yields on Greek 10-year bonds are now around 3.9%, about 50 basis points (half a percentage point) lower than their Italian counterparts. This is the largest relative difference since at least 1999, according to data from Refinitiv.

“I would say that the upgrade (of the bond) has been discounted,” said BNP Paribas analyst Christophe Machado, adding that he does not expect a much larger reduction in the spread of Greek bonds, i.e. the difference in their yields from those of the corresponding German securities.

Greek 10-year bond yields fell by 15 bp. after Sunday’s election result, while the spread against German bonds is at its lowest level since 2021. Greece is currently rated BB+ by S&P Global and Fitch, just one step below investment grade, while Moody’s has rating Ba3, three steps down.

After the bailout ended in 2018, Greece regained access to markets, reduced public debt to a record, and its economic growth is expected to continue to outpace the EU average this year and next, the report noted.

A return to investment grade would be more than symbolic for Greece, he adds, as Greek bonds would be included in government bond indices, attracting steady demand from a much wider range of global investors.

A first upgrade could come in October, when S&P Global’s next rating is scheduled, the publication notes. When the agency gave a positive outlook on the credit rating in April, it said it could upgrade Greece within the next 12 months if the new government maintains fiscal discipline and the pace of reforms that unlock European recovery fund resources.

JPMorgan, which sees a “high probability” of an investment-grade recovery in early 2022, expects the spread over German bonds to stand at 165bps. in March 2024, about 20 m.v. higher than today.

BNP Paribas’ Machado predicts the spread will move between 125 and 180 bp. after the recovery of the investment grade and the inclusion of the Greek bonds in indices against approximately 140 bp. today, suggesting that any further decline will be limited.

Societe Generale analyst Sean Kou also doesn’t expect a major impact from an upgrade from S&P Global in October. “The reason we think it’s already discounted (investment grade) is because now almost everyone expects it,” he added.

Commerzbank’s head of rates, Christoph Rieger, also said he discounted upgrades from other rating agencies that would lead to the inclusion of Greek debt in government bond indices.

According to Rieger, official inclusion in indices could attract buyers, but there may also be some selling by investors seeking quick profits, such as hedge funds, which have already bought Greek bonds in anticipation of such a move.

“When that happens, they may liquidate. So, that’s why I think that in the end we shouldn’t expect a big rally due to the upgrade,” he added.