Athens The new Greek economy and finance minister Kostis Chatzidakis wants to open the door for the country’s return to the league of investment-worthy debtors. As an important step on this path, the Greek government wants to repay the aid loans from the time of the sovereign debt crisis ahead of schedule.
By the end of this year, the country intends to repay two loan installments of EUR 2.65 billion earlier than planned. Conservative Prime Minister Kyriakos Mitsotakis recently announced this in an interview with the Bloomberg news agency. These are bilateral aid loans from the euro countries from 2010, which are normally due in 2024 and 2025.
Mitsotakis, who won a second term in parliamentary elections in late June, expects the country to return to investment grade before the end of this year. This would make Greek government bonds tradable for institutional investors who have not been able to buy these papers because of their junk status. An upgrade would improve financing conditions not only for the state but also for the Greek economy.
The country lost its status as a debtor worth investing in at the beginning of the debt crisis in spring 2010. However, the market has already largely priced in the expected upgrade. The risk premiums for Greek bonds are falling. The yield on the ten-year bond is around three basis points below that of comparable Italian paper, although Italy is investment grade.
Last week’s first market appearance after the elections also showed that Greek debt securities are in demand. The state debt agency PDMA raised 3.5 billion euros with a 15-year bond. The bond was oversubscribed 3.8 times, so demand was significantly higher than supply. The coupon is 4.35 percent. At 4.45 percent, the issue yield on the bond was below the original forecast of 4.5 percent.
Lower yielding securities
Greece has no immediate need for money. The country has a liquidity buffer of an impressive 34 billion euros. This roughly corresponds to the refinancing requirements of the next three years. With the issue, the PDMA primarily wanted to demonstrate a continuous presence on the market. In addition, Greece improves its debt profile with an extension of the average maturity with the new issue.
The same goal is served by the redemption of two relatively young securities, a five-year bond from 2019 and a seven-year bond from 2018. The papers have a total volume of 5.5 billion euros. The PDMA is taking it back at a rate of 100.15. The offering is expected to attract strong interest from investors given the low liquidity of the two bonds.
With the cash buyback, Greece is withdrawing further from the market for relatively high-yield securities with short maturities, reducing its refinancing needs for the next few years and writing off debt. This is an important signal to the financial markets and the rating agencies: Greece is improving its debt profile and reducing the debt burden at the same time.
The economy has yet to catch up
Steps to reduce debt are considered a key requirement for an upgrade to investment grade. Greece has reduced its debt ratio more than any other EU country in recent years, namely by 35 percentage points from 206.3 percent in 2020 to 171.3 percent of gross domestic product (GDP) at the end of 2022. However, it has in the EU still the highest national debt in relation to economic output.
In his government statement, Mitsotakis reiterated the goal of bringing the public debt ratio down to 162 percent of GDP by the end of this year and below 140 percent by the end of the legislative period in mid-2027. Greece would thus probably cede the role of the EU country with the highest debt ratio to Italy. The strong economic growth should help. The Greek central bank expects GDP growth of 2.2 percent this year. For 2024 and 2025, the economists of the central bank set three and 2.7 percent.
This makes Greece one of the growth champions in the EU. However, the backlog demand is also great. The consequences of the sovereign debt crisis are still being felt. Before the crisis, the statistical per capita income in Greece reached 70 percent of the EU average, according to calculations by the Athens central bank. Today it is only 55 percent.
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