Greece is borrowing more cheaply than France and Italy as investors increasingly reward the country’s post-crisis economic reforms and improved fiscal credibility, according to Nick Hill, Managing Director and Global Head of Credit Strategy and Guidance at Moody’s.
Speaking to TA NEA on the sidelines of Bruegel’s Annual Meetings in Brussels, Hill said government bond yields across advanced economies are likely to continue rising as investors demand greater compensation for holding long-term debt.
However, Greece has bucked the broader trend relative to some of its European peers.
Hill attributed Greece’s favourable borrowing costs to the structural reforms the country has implemented since the financial crisis. Investors, he said, look for evidence of economic sustainability and reforms capable of supporting long-term growth.
“The fact that Greece’s current borrowing cost is relatively low is evidence of the structural reforms the country has made since the economic crisis,” Hill said.
He added that Moody’s had upgraded Greece to investment-grade status, strengthening the country’s standing among international investors.
Bond yields face further pressure
Hill expects bond yields to continue rising across major economies, particularly at the longer end of the yield curve.
Since the outbreak of the conflict in the Gulf, yields have risen steadily and recently accelerated across the United States, Japan and Europe. Investors now demand greater compensation for committing capital over longer periods.
Hill said the trend reflects several factors, including repeated economic shocks, greater long-term uncertainty and uncertainty over inflation. The sheer volume of government debt issuance also plays an important role.
Fiscal deficits remain large across many advanced economies, while central banks have largely ended the quantitative-easing programmes that previously absorbed significant amounts of government debt.
Private investors must therefore absorb a much larger share of new bond issuance, which pushes borrowing costs higher.
Higher interest costs threaten government budgets
Hill warned that higher yields will increasingly put pressure on government finances.
Even governments that maintain their existing spending levels will need to find additional money to service their debt as interest costs rise.
Most Western economies benefit from strong institutions and relatively sound fiscal frameworks, he said, but governments will still face difficult choices as they seek to fund rising interest bills.
Markets remain willing to take risks
Despite geopolitical uncertainty and higher borrowing costs, investors have not dramatically reduced their appetite for risk.
Credit spreads remain close to historic lows, indicating that markets are demanding relatively little additional compensation for credit risk. Equity markets also remain relatively elevated, while strong corporate earnings have supported generally healthy corporate fundamentals.
Energy markets, meanwhile, have reacted more visibly to the supply shock in the Gulf.
Oil prices initially surged but have since stabilised below their early peaks. Hill said China’s decision to draw on accumulated reserves rather than continue buying at elevated prices probably helped contain the increase.
European natural gas prices, however, have reached a three-year high, demonstrating that the energy shock remains significant.
Why Greece stands out
The divergence between Greek, French and Italian borrowing costs represents a significant reversal from the years following Greece’s sovereign debt crisis.
Investors now appear to place greater emphasis on Greece’s improved fiscal position, structural reforms and investment-grade credit status. Those factors have helped Greek government debt become more attractive relative to the debt of some larger European economies.
For Greece, the development offers an important benefit: lower borrowing costs reduce the amount the government must spend servicing its debt and strengthen its ability to manage future fiscal pressures.
But Hill’s broader warning remains relevant. Even Greece cannot completely escape the global rise in long-term borrowing costs. As governments issue more debt and private investors absorb an increasing share of it, yields across advanced economies could remain under upward pressure.
