Greece: From Tragedy to Creditworthy
Greece recently received a credit rating upgrade, to Baa3, marking its return to investment-grade status under Moody’s after a fourteen-year hiatus. This development is particularly significant given the country's tumultuous financial history, especially the dramatic four-notch downgrade experienced in June 2010 following the European sovereign debt crisis.
"Based on the government's policy stance, institutional improvements that are bearing fruit, and a stable political environment, we expect Greece to continue to run substantial primary surpluses, which will steadily decrease its high debt burden," Moody's stated. Of particular note is the agency's expectation that Greece will continue to generate substantial primary surpluses, gradually reducing its historically burdensome national debt.
The Greek banking sector has been instrumental in this recovery. Having endured severe challenges during the 2009 financial crisis, banks have undergone comprehensive restructuring through strategic government interventions. These efforts have successfully transformed the financial landscape, with institutions now demonstrating renewed profitability and enhanced resilience.
While rating upgrades from Moody's and potentially other rating agencies signal economic improvement, our investment approach demands a more sophisticated analysis. The EPIC proprietary Net Foreign Asset (NFA) Model provides a critical counterpoint to conventional ratings. Notably, this model identified Greece's structural vulnerabilities in 2007, well before the European Debt Crisis erupted, currently rating the nation at one star—the most precarious position among developed economies.
The EPIC Fixed Income Team’s investment strategy prioritises nations with demonstrable debt repayment capacity. Chile presents a more compelling investment proposition, rated three NFA stars (on a scale of 1-7 starts, 7 being the wealthiest). Its Baa1 rated bond maturing in 2037 offers an attractive 5.84% yield, compared to Greece's government bonds which, whilst maturing in the same year, yield a more modest 3.77%.
We have consistently argued that traditional rating agencies and bond markets are very often misaligned. Our approach integrates the NFA Model with our core Relative Value Model, enabling us to identify undervalued bonds rather than simply accepting market-perceived "safe" investments. This methodology allows for a more nuanced and potentially more profitable investment strategy.
Ultimately, while Greece's financial recovery is noteworthy, discerning investors must look beyond surface-level improvements.
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