Article by the Deputy Governor of the Bank of Greece Christina Papaconstantinou for the Capital Link’s Forum, digital journal titled “Regaining Investment Grade status: causes and effects”
11/12/2023 - Articles & Interviews
In 2023, Greece regained Investment Grade (IG) status, a milestone achievement following a series of credit rating upgrades in recent years. How did this development come about? Moreover, what does it mean for the Greek economy?
In order to get here, Greece had to go through significant economic adjustment. Since the debt crisis, it has managed to eliminate its fiscal imbalances by achieving primary surpluses and a downward trajectory for public debt. The return to IG, which is seen by many institutional investors worldwide as a prerequisite for longer-term investments, has taken Greece more than thirteen years. This highlights the difficulty of the whole undertaking and also suggests that the credibility of economic policy is critical for securing the trust of financial markets which, if lost, takes a long time to recover.
Meanwhile, especially in recent years, the Greek economy has proven resilient to various external shocks, such as the Covid pandemic, the energy crisis and the war in Ukraine and the subsequent rise in inflation. This was manifested as better-than-expected growth momentum, supported in part by investment. At the same time, fiscal policy remained prudent, and public debt declined, aided by its very favourable characteristics, such as its long weighted average maturity and low sensitivity to changes in interest rates. These factors, combined with the reduction in the stock of non-performing loans in Greek banks, paved the way for the credit rating upgrade to IG.
This achievement has already helped to mitigate the impact of rising interest rates on funding costs for the public and private sectors. In particular, Greek government bond yields are now at lower levels than at the beginning of 2023, in contrast to other eurozone countries. Research studies by the Bank of Greece find that this development is due to the upgrade-induced compression of risk premiums, which is already having beneficial effects on the entire economy. For example, yields on bonds issued by Greek banks have also fallen significantly, helping to contain banks’ funding costs and interest expenses, right at a time when they need to issue bonds to meet MREL targets.
The Bank of Greece expects that the upgrade to IG will have significant positive effects on activity and enhance economic resilience. In particular, the IG upgrade could lead to an increase in GDP by 2.5% in the long run, thanks to lower financing costs, improved confidence in the Greek economy and higher foreign investment inflows.
However, there is no room for complacency; we still have a long way to go to converge towards the average rating of eurozone countries (i.e. A+). For this to happen, it is necessary to further implement structural reforms, especially with a view to increasing the effectiveness and efficiency of public administration, speeding up the delivery of justice and strengthening the functioning of public institutions, as well as to continue pursuing a prudent fiscal path to ensure that public debt remains sustainable.