Markets move far ahead of rating agencies

Bond markets clearly rate Greece’s debt and credit capacity at “investment grade,” and at least at the BBB level, while the rating agencies continue to keep the country in the “junk” category.

The impressive rally in Greek bonds has shown that the markets do not always heed the rating agencies; it’s likely the former look much further ahead than the latter.

The markets are chasing the opportunities created by significant catalysts in the mix of Greece’s outlook; they are not afraid of recession or the shock to tourism, but rather bank on their recovery. In contrast, the rating agencies are waiting for tangible evidence of that rebound before they make any upgrade decisions.

Just like in the 2010s, the agencies appear very slow in their response and usually – though not always – trail the markets. In practice they do not act proactively, which would have been more useful for their clients, the major investors.

All four major rating agencies put Greece below investment grade, and although it is at the BB level, it is still considered “junk.” 

This “junk” status is maintained even though the performance of Greek bonds has been one of the best in the world amid the pandemic and the recession it has generated, reaching all-time lows last week.

Greece’s benchmark 10-year bond yield stands just 65 basis points above Spain’s and Portugal’s and about 10 basis points shy of Italy’s, with those three countries enjoying investment grade.

“The gap between market perception and sovereign ratings is not unusual. Ratings and sovereign bond yields do not capture identical risks,” says Michele Napolitano, senior director and head of Western European Sovereigns at Fitch Ratings.

He tells Kathimerini that “Fitch’s ratings are purely a measure of the relative rank ordering of credit (i.e. default) risk, while bond yields reflect a broader mix of fundamental factors such as policy interest rates, inflation and exchange rate expectations; as well as market liquidity and risk appetite conditions.”

“Bond yields may also be influenced by central bank operations (such as quantitative easing), by government or regulators changing liquidity requirements or risk weighting of assets or by clearing houses changing collateral requirements,” explains Napolitano.