After the election, investors began to perceive that Athens was now perceived as less risky than Rome.
Markets responded positively to Monday’s result. KyriakosMitsotakis’s party is now just four seats shy of the 150 required for a majority in parliament. A new vote will be held next month. Prices rise and yields drop.
This move has resulted in the widest gap between Italian bond yields and Greek bond yields since 1999. Italian debt yields 4.3 per cent.
Greece and Italy have historically been viewed as the riskier debt markets within the EU. However, the yields of Greek debt are higher than those of Italian debt. This reflects the market’s concerns about the debt burden of the country. Its yields soared during the Greek Debt Crisis in 2011 and 2012
The spread briefly became negative a couple of times — meaning that Greece’s borrowing cost was lower than Italy’s — most recently at the end 2019.
The spread has recently turned negative in April this year, and is widening at the same time that Greece gets closer to regaining its investment grade rating.Holger Schmieding is the chief economist of German investment bank Berenberg.
“Italy performs remarkably well under Giorgia Melons. “But under KyriakosMitsotakis Greece has become the star performer of the eurozone’s more significant countries,” said he.
This year, both Greece and Italy were among the best-performing bond markets in the EU. The ICE Bank of America Index of Italian Bonds shows a total gain of 2.7% year-to-date, while the Greek counterpart is up 4.2%. This compares to a return for the Eurozone of just 1.2 percent.
The spread between German and Greek bonds, a popular measure of risk, was reduced to 136 basis point on Monday. This is the lowest since November 2021.
Analysts say that the surge in Greek bond values was probably fuelled by investors who bought bonds quickly to get ahead of any upgrade to investment-grade status. This would have opened up Greek bonds for a larger pool of investors.
Richard McGuire of Rabobank’s rates strategy said that hedge funds closing short positions which grew in the lead-up to the elections may have also boosted the Greek Bond Market on Monday.
Sean Kou is a rates strategist with Societe Generale. He says that “an upgrade [to investment grade] [for Greece] has been priced in”.
The Greek government’s debt, as a percentage of GDP, dropped to 171 percent last year after surging up to 206 percent during the pandemic. This was its lowest level since 2012. It also represented one of the fastest rates of debt reduction around the world.
The rate of decline is expected to continue in 2023. This will be aided, among other things, by a high inflation rate, a resilient economy, and a primary surplus. Italy’s debt-to-GDP ended last year at 144,4%. This is down from just under 150 percent a year ago.
Schmieding of Berenberg said that Greece’s debt to GDP ratio “looks like it will fall below Italy’s by 2026”. Greece’s strong growth is aided by the fact that the EU institutions who bailed out the country a decade earlier still own a large portion of its debt. This makes it “less vulnerable to rate increases than other economies”.
Steffen Dyck is a senior vice president at Moody’s. He said that the election results of the weekend were “credit-positive” as they “would suggest continuity in fiscal policies and economic policies”. They also improved “the chances for a further substantial reduction” in Greece’s debt burden.