Chrysostomos Tsoufis

December 1, 2023, exactly 20 days before… O rating agency Fitch becomes the 2nd of the big three that… returns the investment grade to our country and at the same time certifies its return to the “housewives” club. The event was welcomed by the government and experts, many articles were written about the positives that the investment grade brings to the Greek economy, but all the positions have a common point. They were unable to give numbers – so that even the less initiated or the last unbelieving Thomases – could understand the benefits of this development in the Greek economy.

All this until yesterday when its interim monetary policy report was published Bank of Greece. In the report, Central Bank economists attempt to quantify the “benefits” of investment grade.

The report mentions as the main effect (apart from the reduction of uncertainty, the improvement of the economic climate and others) the reduction of the State’s borrowing costs with a direct consequence of the reduction of the cost of financing for the entire economy through the banks.

In fact, the benefits are not one-time but lasting, the investment grade is characterized as a permanent positive disturbance that reduces the cost of borrowing in the financial sector by 100 basis points.

As can be seen from the table below, the benefits begin to be seen from the first 3 months and extend over time even after 5 years and are quite impressive:

INVESTMENT GRADE EFFECTS

1st trimester – 8th trimester – 20th trimester – Long term

GDP +0.5% +0.8% +1.1% +1.3%

Investments

Business +1.3% +3.1% +2% +1.6%

Investments in

Residential +0.7% +2.6% +4.3% +3.2%

Overall

Credits +0.1% +2.2% +3.2% +4.2%

According to the report’s findings, as banks’ funding costs decrease, they begin to reduce the interest rates on the loans they grant and simultaneously increase the supply of credit to the real economy.

This in turn results in households increasing their consumption and investment spending on housing and businesses increasing capital investment.

This increases the value of residential and business capital.

In a chain, and since these assets act as real collateral for the granting of loans, according to the Bank of Greece, the result is to reduce non-performing loans and therefore to strengthen the funds and balance sheets of banks and therefore to increase again the available loans capital.

As the banks’ “books” improve, it is understandable that their own creditworthiness also increases and in general the stability of the financial system is strengthened, which at the same time becomes more resistant to external factors that can affect economic activity. Consequently, the interest rate required by depositors to trust banks falls, again squeezing lending rates. This fact secondarily leads to a re-increase in the valuation of real collateral, a reduction in bad debts and an increase in the supply of credit to the real economy, thereby boosting economic activity.

The Central Bank itself notes that the figures it ends up with may be significantly larger since its calculations do not take into account parameters such as the reduction of uncertainty and the attraction of foreign investments.

After all this, it is completely understandable why the Central Bank of Greece is asking for fiscal stability to be preserved and the reform effort to be strengthened, which are both the 2 main forces that will push the rating agencies to additional upgrades of the country’s credit rating and therefore even more benefits for the economy .