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With Grexit Averted, Guess Whose Debt Outperforms?

Remember Grexit? It was 2015 and unlike Brexit a year later, the pejorative for Greece is a fading figure of speech coined by London news media now belatedly acknowledging their own folly contributing to the UK’s calamitous vote to leave the European Union.

Just about everyone back then said the newly elected government of Prime Minister Alexis Tsipras would default after promising to end five years of reduced government spending during a depression while securing the final $8.7 billion bailout from resistant EU creditors. Former Federal Reserve Chairman Alan Greenspan told the British Broadcasting Corp. that “it was just a matter of time” before Greece abandoned the monetary union and the euro disintegrated. George Soros, the billionaire chairman of Soros Fund Management, said in an interview with Bloomberg Television around the same time that “Greece is going down the drain.” Marcel Fratzcher, the Oxford- and Harvard-educated former head of policy analysis at the European Central Bank and president of the German Institute of Economic Research, called Greece a “political and economic catastrophe.”

Grexit never happened because the bond market said so. Benchmark Greek debt already had rallied from the April 2012 low of 25 cents on the euro and by March 2015 traded at a 194% premium to the century’s worst valuation, reflecting public opinion polls showing no desire for a return to drachmas. Whatever destruction resulted from 25% unemployment and smashed windows in downtown Athens, the violence in the Land of the Gods paled beside the Jan. 6th insurrection at the US Capitol after President Donald Trump lost his 2020 reelection bid by seven million votes. Investors, meanwhile, have made Greek bonds their favored sovereign debt.

All of which is the tell-tale sign that Greece is the economic counterweight to the failures of Silicon Valley Bank and Signature Bank and the frenzy over Credit Suisse and First Republic. The nation of 10.3 million, contrary to every credit rating, has been an investment-grade economy since December 2021 based on favorable trends in its inflation rate, per capita gross domestic product, GDP growth, non-performing loans and political stability, according to data compiled by Bloomberg. In the bond market, Greece is trading at least three grades above what investors consider high-risk, high-yield debt and soon enough should reclaim the investment-grade rating last conferred by Moody’s Investors Service, S&P Global Ratings and Fitch Ratings in 2008.

Since Prime Minister Kyriakos Mitsotakis was elected into the Maximos Mansion in 2019, the nation’s per capita GDP expanded 7%, outpacing major economies, including Germany (1%), France (1%), Italy (2%), Spain (-2%), UK (1%) and the US (4%), according to data compiled by Bloomberg. Non-performing loans as a percentage of total loans for Greek banks, the measure of banking sector health, fell to 6.8% from 47% in 2017 and the lowest since 2011. The non-performing loan ratio was reduced by at least 32 percentage points, a magnitude of improvement unsurpassed by the banking industry anywhere, according to data compiled by Bloomberg.

The turnaround is captured by the Bloomberg Country Risk Political Score for Greece, which measures a country’s ability and/or commitment to service its debt and/or cause turbulence in the foreign-exchange market was compiled in 2009. Greece with a political risk score of 49 improved 25% in the three years after Mitsotakis took office, outperforming Germany (82, -2%), France (86, 0%), Spain (67, -1%), UK (91, -1%), US (87, -2%) and Italy (44, -8%), according to data compiled by Bloomberg. 

“We used to be the basket case of Europe,” Mitsotakis said in an interview at the Maximus Mansion in Athens earlier this week. “Now, we’re the second-fastest growing economy in the Eurozone” with robust tourism, “record foreign direct investment” led by Microsoft Corp. and a burgeoning film industry. The 55-year-old, Harvard-educated Mitsotakis said “Greece has gained a brand,” increasingly defined by technology companies that will make the country a regional center for education and healthcare.

To be sure, Greece’s per capita GDP and political score are still smaller than for most European neighbors. “We have corrected microeconomic balances and this is reflected in this data, but we have a lot to do on institutions” such as “delays in infrastructure,” Yannis Stournaras, governor of the Bank of Greece, said at the central bank’s office earlier this week. “I think this is one of the reasons that credit-rating organizations do not upgrade us. This terrible accident,” when colliding trains south of the Tempe Valley caused the deadliest rail disaster in Greek history in February “is proof of this.”

But even as resurgent inflation undermines global stability, Greece is growing faster than its recent past and faster than the group of countries sharing the euro, adjusting for inflation. Non-performing loans are declining faster than the rest of the world as Hellenic Republic political risk abates.

The country’s economic recovery is ratified in its low cost of borrowing, which declined to 3.9% from 15% in 2015 and 63% in 2012, according to data compiled by Bloomberg. Greece today can obtain loans at a cost that is 10 basis points lower on average than investment-grade borrowers. Its debt last traded so favorably in 2005 when the nation was rated “A,” the sixth-highest investment-grade rating and five levels above what is considered high-risk, high-yield debt.

The combination of declining yields and a strengthening economy made Greek bonds the best performers worldwide with a five-year total return (income plus appreciation) of 18% when similar benchmark debt for the European Union, Germany and France lost 11%, UK bonds depreciated 13% and global Treasuries lost 11%. Anyone who bought Greek debt in 2013 has an unapproachable 214% return for a developed economy. Shares of the 60 Greek companies traded on the Athens Stock Exchange are proving to be world beaters this year with a return of 12%. 

Mitsotakis, who is seeking a second four-year term in May, said “Greece by 2030 will be a completely different country” because “we’ve been able to deliver a high growth trajectory with fiscal discipline at the same time.” 

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--With assistance from Shin Pei.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matthew A. Winkler, editor in chief emeritus of Bloomberg News, writes about markets.

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