Greece’s sovereign debt yield falls to its lowest level relative to Italy in 24 years

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The discount on Greek government bond yields relative to Italian ones rose to its highest level since at least 1999 after the prime minister secured an election victory, underscoring investors’ growing perception that Athens is now less risky than Rome.

The yield on benchmark 10-year Greek debt fell more than 0.15 percentage point to 3.85% on Monday as markets responded positively to the outcome, which left Kyriakos Mitsotakis’s party just four seats short of the 150 needed for a parliamentary majority. A new vote is set for next month. Yields decrease as prices rise.

The move means that the gap – or spread – on Italian bond yields relative to Greek bond yields is now at its widest level since at least 1999, according to Bloomberg data. Italian debt yields 4.3%.

Greece and Italy are seen as two of the riskiest debt markets in the EU, but yields on Greek debt have traditionally been the higher of the two, reflecting market concerns about the country’s debt burden. Its yields skyrocketed during the Greek debt crisis in 2011 and 2012.

A couple of times the spread briefly turned negative, meaning Greece’s borrowing costs were lower than Italy’s, particularly at the end of 2019.

Most recently, the spread turned negative again in April this year and has widened as Greece gets closer to restoring its investment grade status.

“For once, the market is right,” said Holger Schmieding, chief economist at German investment bank Berenberg.

“Italy is doing very well with Giorgia Meloni. But under Kyriakos Mitsotakis, Greece has become the leading player among the most significant countries in the eurozone,” she said.

Both Greece and Italy have been among the bloc’s best-performing bond markets this year. An ICE Bank of America index of Italian bonds shows a total return of 2.7% year-to-date, while its Greek counterpart gained 4.2%. This compares with a 1.2% yield for the eurozone.

Falling yields on Greek 10-year bonds on Monday narrowed their spread against German bonds – a popular measure of risk – to 136 basis points, the lowest level since November 2021.

The surge in Greek bond prices was likely to have been fueled by “fast money” investors buying the bonds to anticipate any upgrades to investment grade status, which would have opened up Greek bonds to a larger pool of investors, they said the analysts.

Richard McGuire, head of rate strategy at Rabobank, said hedge funds are closing short positions, which he grew up ahead of the electionsMay also have boosted the Greek bond market on Monday.

According to Sean Kou, interest rate strategist at Société Générale, “an [investment grade] update [for Greece] it has a price now”.

After surging to 206% during the pandemic, Greek public debt as a proportion of GDP dropped to 171% last year, the lowest level since 2012 and one of the fastest rates of debt relief in the world.

It is projected to continue declining in 2023, aided by high inflation, resilient growth and a primary budget surplus. Italy’s debt/GDP ratio closed last year at 144.4%, down from just under 150% the previous year.

Greece’s debt-to-GDP ratio “looks set to fall below Italy’s by 2026,” Berenberg’s Schmieding said. In addition to strong growth, Greece also benefits from the fact that much of its debt is still owned by the EU institutions that bailed it out a decade ago and is therefore “less exposed to rate hikes than other economies”.

Steffen Dyck, senior vice president at Moody’s, said the weekend’s election result was “credit positive” for Greece as it “would suggest continuity in fiscal and economic policies” and improved “the prospects for significant further reduction” of the country’s debt burden.