Zooming Out On Greek Spreads

Greek politics and the eventual attainment of IG status for Greece remain front and centre for GGB spreads, even during a week or so of relatively notable outright German cheapening and against the recent backdrop of hawkish ECB repricing on the OIS strip (albeit with terminal rate pricing off of April highs).

• It is hard to define clear lines in the sand re: the situation when it comes to markets, although the fresh all-time lows for Greek 10s vs. Italian paper have some suggesting that the bulk of the tightening move has run its course.
• That argument is less compelling if we get some swifter than expected action from ratings agencies if Mitsotakis can secure on outright majority in the next round of Greek elections.
• Worries surrounding TLTRO repayments on the part of Italian banks may also present further tailwinds for Greek outperformance vs. BTPs in the coming weeks.
• We also note that the 10-Year Greek/German spread is operating at levels that were last seen (on a closing basis) in ’21, showing just below 140bp as of typing. Still, these levels are over 40bp off the ‘21 (post-sovereign debt crisis) closing lows, once again suggesting further scope for tightening if Mitsotakis can secure on outright majority and ratings agencies react in a swift manner.
• We stress that such outcomes are unlikely to come via a straight-line move (if they do come to fruition at all) after the initial post-election tightening impulse wanes, and are probably contingent on swift commentary/action from ratings agencies in the event of Mitsotakis securing a majority.

Fig. 1: Greek 10-Year Spreads Vs. German & Italian Equivalents (%)

Source: MNI - Market News/Bloomberg