The political danger created by the French elections still looms over European equity, bond and foreign exchange markets. Investors have only so far written off the political risk premium, according to some analysts.

The “bell” of danger is rung by Moody’s House on France’s public debt outlook if political strife leads to a substantial deterioration of its fiscal and debt levels. A weakening of the commitment to fiscal consolidation will increase downward credit pressures. France’s increased debt burden increases its exposure to higher funding costs and could lead to a faster-than-expected rise in interest payments on the country’s and EU countries’ bonds, Moody’s warned.

The house warned that the country’s outlook could be downgraded to negative from stable if it sees more deterioration in debt servicing costs compared to its peers.

“France may become Europe’s new weak link,” according to some analysts. The difficult equation of the budget deficit should be solved immediately and not later and sooner or later the concern will spread to French bonds as well. Just look at the yield premium investors are asking for holding French bonds over safer German bonds: it hovered around 40 to 50 basis points before Macron dissolved parliament and is now trading at over 60 basis points. The spread has likely entered a new, higher price range, reports the Societe Generale.

The risk of a new euro crisis should not be ruled out, according to the well-known Reuters columnist, Hugo Dixon, which focuses on the fiscal problems facing the French and Italian economies. An inability to correct fiscal imbalances will also create a problem in the Eurozone, as happened in the past 10 years. France and Italy are much larger economies than Greece and the other eurozone members at the center of the latest crisis, he notes.

Political paralysis in France until the fall of 2025 sees the Citi. This has negative consequences for the French economy and public finances, but more worrying for Europe. The analysts of the Swiss house UBS believe that the volatility will remain high, as some degree of risk premium will remain. The end of the reforms in France, she sees Berenberg and estimates that downgrades are coming, due to fiscal problems and a negative investment climate.

Political uncertainty is at the fore, with the French election, with most analysts expecting equity market volatility to increase as the US approaches presidential elections in November.

Bonds

The Greek bond market appears particularly resilient, despite the uncertainty caused by the political developments in France.

If there is turmoil in the European bond market, how much could it hurt Greek bonds?

It is a fact that the Greek economy today is fortified, it is at an investment stage and with a good fiscal image. Today the French government deficit is already around 5% of GDP and for us it is around 1% for this year. The only thing the Greek government can do is to shield the market, continuing fiscal stability.

We should point out that the ECB has a line of defense in case of turmoil in European bonds. After the bankruptcy of Greece, a new tool was created – “superplane”, the Transmission Protection Instrument (TPI), with which purchases can be made in the secondary market of securities from issuing countries experiencing a deterioration in financing conditions.

Greece expects further upgrades by the end of the year, the next assessments until the end of 2024 are: DBRS September 6, Moody’s September 13, Standard and Poor’s October 18, Fitch November 22 and Scope Ratings December 6.

Of particular interest is the assessment of Moody’s, on September 13, 2024, which is the only house that has not upgraded Greece to investment grade, with the assessment of Greece’s long-term creditworthiness remaining at Ba1 (one notch below the investment) with stable re-evaluation prospects.

“Tough” Moody’s did not upgrade last March and now hopes are shifting to September. However, Moody’s made a surprise in its last opinion last September 2023 and upgraded Greece by two notches.

Moody’s is the largest in the world, which is why the potential demand in the event of an upgrade for Greek bonds can now even reach 20 billion euros.

We should note that an executive of the house, Mr Colin Ellis who spoke at the Economist conference opened a “window” for the upgrading of the Greek economy to investment grade by Moody’s.

Without committing to the rating agency’s intentions, Colin Ellis noted that “on September 13, when the new rating is scheduled, things will be better.”

The banks

Greek banks, after obtaining the investment grade, are more fortified in any financial crises, as their liquidity is guaranteed, due to the eligibility of their bonds for borrowing from the ECB. Banks are expected to have lower funding costs and improved liquidity due to their inclusion in all of its future operations. They will be able to borrow from the ECB with a guarantee of government bonds that will be valued at their real value. Until today, the ECB exceptionally accepted Greek bonds as guarantees but with a 50% discount to their value.

The upgrading of the public’s credit rating also upgrades the creditworthiness of the banks, which will be able to borrow at lower interest rates from the interbank market. Cheaper borrowing for banks means equally cheaper borrowing for businesses and households.

It should be noted that all Greek banks have been upgraded to investment grade, and indeed two scales above the minimum threshold.

For banks, upgrade to investment grade translates into improved financing conditions, interest cost savings on future issuances MREL (Equity and Eligible Liabilities Requirement) of approximately 8 billion and improving the quality of their securities portfolios, which mainly consist of Greek bond securities.

We got a taste of what the upgrades to investment grade mean for the banks from the recent issuance of the Piraeus bond.

The transaction attracted strong investor interest with participation from over 200 institutional investors, with 70% allocated to fund managers, insurance companies and pension funds, 21% to banks, 7% to hedge funds and 2% to other investors. .

The total order book of the transaction exceeded 4.1 billion, exceeding by more than 8.2 times the initial issuance target of 500 million, and this is the largest book recorded in a High Paying Priority bond issue by a Greek bank in recent years years. The final yield stood at 4.625%, against an initial target of 5.00%. The issue is the first issue of a new investment-grade Greek bank bond.

The success is further reflected in the historically low credit margin of approximately 170m.p. for the transaction, which is lower by more than 50 m.p. in relation to the corresponding margin of the April 2024 issue and lower by more than 200 m.p. in relation to the margin of the November 2023 issue.

Recently the Standard & Poor’s and Moody’s they gave a strong vote of confidence to the banks by proceeding to upgrade the Greek

As S&P notes, the active clean-up of the Greek banking system’s balance sheets is coming to an end, as Greek banks achieve a full post-crisis recovery and begin to benefit from the positive economic momentum in Greece.

Banks in Greece have also individually, according to the house, made significant progress towards improving profit generation and the resilience of their business model. Three of the four largest Greek banks already show non-performing exposure (NPE) ratios of 3%-4% at the end of the first quarter of 2024, and S&P expects further improvement by the end of 2026.

Athens Stock Exchange

Any disturbance in the European stock markets, how much can it affect the Athens Stock Exchange?

In a recent analysis by National Stock Exchange, he cited a series of data that could offset any pressures from abroad.

The stock market refers to the political stability in Greece, unlike many European countries, the supportive macroeconomic backdrop (GDP growth >2.0%, much higher than EU averages, the Greek economy will continue to grow steadily over the next two years and outperforming the wider eurozone economy), returning investor confidence, increased liquidity, attractive valuations, strong corporate earnings and the market’s high dividend yield, which is the highest of European markets.

In terms of valuation, the p/e of the Greek market is 8, lower than the 14 of the European markets and the 20 of the American markets.

At the same time, the capitalization/GDP ratio of the Greek stock market is considerably lower than other markets.