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Greece shines among euro public debt peers

04/07/2003 14:00
ONCE the laggard of the eurozone economies, Greece has turned itself around to become the rising star of the area's government bond market thanks to solid growth and steps to rein in government spending, analysts say. helping improve the credit quality of Greek sovereign bonds.

Yields have fallen sharply since Greece joined the single currency club in January 2001 and earlier this month hit record lows in the benchmark 10-year area around 3.62 percent. The latest move lower came as international credit ratings agency Standard and Poor's lifted its long-term ratings on Greece to A+ from A.

"The Greek bond market has done incredibly well and could do well in the future," said Gianluca Salford, European fixed income strategist at JPMorgan in London. "Spreads between Germany and Greece are very tight. If you compare Greek bonds with BTPs, they are trading in line with each other but Italian bonds are perceived to have more credit quality."

The yield spread between benchmark 10-year Greek and German government bonds has narrowed to around 18 basis points (bps), from 28 bps in February. It was around 60 bps just before Greece joined the euro. A narrowing trend in the yield gap shows the risk premium over Germany, Europe's benchmark triple-A rated issuer, falling. The Greek-Bund yield spread is close to that of the Italian-German spread, currently at 18 bps. Analysts say this is significant as Italy, the euro zone's third biggest economy, has a double-A credit rating, two notches above Greece, one of euro zone's smallest economies.

Greece did not fully meet the economic criteria to join the euro zone in the first wave of membership back in 1999. But euro membership has increased the lure of Greek bonds with inflation, the bane of debt markets, brought under control and the country's fiscal position improving. "We like their credit going forward and there is more upside," said UBS fixed income strategist Monique Wong. "In the next 12 months there is a chance of another ratings upgrade."