Greece has lost the dubious distinction of being the riskiest government borrower in the eurozone after its bond yields dipped below Italy’s for the first time since 2008.
Greek bonds have staged a powerful rally this year as investors hungry for yields have snapped up debt from former euro area crisis spots — a trend that gained further momentum after Standard & Poor’s upgraded Athens’ credit rating to BB- late last month. Italian debt also performed strongly during the summer’s global bond rally, but some investors remain wary due to the effects of last year’s political tensions.
Greek bonds held steady during a global debt sell-off on Thursday, with the country’s 10-year yield at 1.10 per cent, a shade above last week’s all-time low. The equivalent Italian yield, meanwhile, rose to 1.16 per cent. Yields rise when prices fall.
Both countries’ yields — which spiked during the euro debt crisis — remain very low by historical standards, but Greece’s bond market rehabilitation has been the more spectacular.
Yields surged above 30 per cent in late 2011 before Athens defaulted on its debt, forcing losses on private creditors. Investors have been encouraged by the relatively strong rebound in Greece’s economy this year while the rest of the eurozone flags, and the election of a centre-right government under Kyriakos Mitsotakis in July has raised hopes that market-friendly reforms will be accelerated.
The small size of Greece’s bond market — much of its enormous debt load is in the form of low interest loans to the EU and IMF following a series of bailouts — means there is less immediate pressure on government finances compared with Italy, which relies solely on markets to refinance its own huge debt pile.
“We still hold some Greek bonds based on our view that the economy has bottomed,” said Chris Jeffery, a fixed-income strategist at Legal & General Investment Management. “But much more important is the debt structure. There are very few cash flow requirements for the next five years. With Italy, you always have the rollover risk.”
Despite its recent upgrade, Greece’s debt rating remains firmly in “junk” territory. However, some investors are betting that a relatively buoyant growth outlook has opened a path back to investment grade. That would trigger Greece’s inclusion in the European Central Bank’s programme of debt purchases.
Italy’s economy, meanwhile, remains mired in sluggish growth. Although S&P rates its debt several notches higher than Greece’s, Italy has a negative outlook on the rating. A new coalition between the centre-left Democratic party and the anti-establishment Five Star movement was formed in September, but some investors fear a return to the political instability of last year when the previous government clashed with the EU over the size of its budget deficit.