The article first appeared on OMFIF on Jan 30th, 2025

Burham Khadbai is Head of Content, Sovereign Debt Institute, OMFIF.

Greece should look to Portugal for inspiration in economic recovery

Greece’s first publicly sold bond transaction in 2025 was by far the biggest statement in its journey over the past decade to regain trust and credibility with investors in the capital markets.

Not only did Greece achieve a record order book in terms of size at over €40.5bn, it was also the biggest by the number of investors with over 270 accounts submitting orders. But even more impressive was Greece being able to achieve such demand despite the bond coming on the same day as the European Union – one of the largest public sector issuers in the continent – which raised €11bn via a dual-tranche transaction.

‘We went to the capital markets for the first time with a big elephant,’ said Dimitrios Tsakonas, director general of Greece’s Public Debt Management Agency. ‘Even a year ago we would have had doubts about opening books on the same day as an issuer of this size.’

Greece’s 10-year deal was sold two weeks ago at a spread of mid-swaps plus 102 basis points and a yield of 3.6% via Bank of America, Deutsche Bank, Goldman Sachs, Morgan Stanley, National Bank of Greece and Société Générale. The new issue premium was estimated at around 5bp.

Return to investment grade

Greece’s return to investment-grade status with various credit rating agencies over the past year has helped boost demand for Greek government bonds. Fitch, S&P and Scope moved Greece to investment grade with a rating of triple-B in 2023 following improved fiscal and macroeconomic conditions. Moody’s, however, still rates Greece one step below investment-grade at Ba1, although it does hold a positive outlook on the sovereign, meaning an upgrade is likely to follow.

‘We deserve to be back to normality,’ said Tsakonas. ‘Things are getting better gradually. The fiscal outcome is impressive and the structural reforms are working. We have delivered what we promised and we have regained our credibility.’

The marked improvement in the quality of the distribution of Greece’s bonds is also impressive. More than half (52%) of the deal was sold to fund managers, followed by banks (29%), with only 9% going to hedge funds. The allocation to real money investors has increased significantly over the last few years. In 2018, they were allocated 45.6% of Greek government bonds with hedge funds taking 31.5%, according to data from the PDMA. However, in 2024, it is estimated that real money investors took up 63.7% of the bonds with hedge funds allocated only 6.7%.

Greece also now sits in a more advanced position in the European government bond market, particularly among its peers in southern Europe. Greek 10-year government bonds currently trade at a yield of 3.2%, very close to France and only 10bp above Spain. Meanwhile, Greece’s spread to Italy has widened to 30bp and its 10-year spread to Bunds has narrowed to 72bp.

So what is next for Greece on its remarkable comeback in the capital markets? ‘Our ambitious target is to regain ‘A’ status as soon as possible,’ said Tsakonas. That is certainly ambitious considering Greece has only just entered the rungs of investment grade, but with the trajectory of the country’s economic fundamentals, it might not be too far away.

Shining example

If Greece needed inspiration, it could look to Portugal, which, like Greece, was pushed into junk territory following the euro area sovereign debt crisis. Portugal has recovered remarkably and, as of last year, is now rated single-A with all the major credit rating agencies.

Similar to Greece, Portuguese government bonds have been performing well and far higher than where their credit ratings suggest. ‘Over the last couple of years, we’ve been trading a lot closer to Belgium and Austria and since the end of the summer we are inside Belgium government bonds for our entire curve despite Belgium being a double-A rated sovereign,’ said Rui Amaral, board member at the Portuguese Treasury and Debt Management Agency (IGCP). ‘Even when we were at triple-B we were trading at par or through then higher-rated countries such as Spain.’

Portugal’s syndication earlier this month was priced 11bp inside of Belgium, which came two days before with a transaction at the same maturity and with a more favourable market environment. Portugal was able to attract strong demand with the €4bn 10-year deal pricing at mid-swaps plus 55bp and a yield of 3.1% via BBVA, BNP Paribas, CaixaBI, Crédit Agricole, JP Morgan and Morgan Stanley.

‘Our spreads faced some widening pressure during that morning, but we still felt that we could tighten our transaction by a couple basis points, which we did to plus 55bp, leaving a new issue concession of just 2bp,’ said Amaral. ‘What was even more encouraging was that good quality and real money accounts came in at those tighter levels, improving the quality of the book and allowing us to do a larger deal than we had intended to.’

Huge inflows

Portuguese government bonds have also had a boost from re-entering the FTSE World Government Bonds Index. ‘The main impact from this is on the secondary market liquidity,’ said Amaral. ‘In October, we saw huge a flow of investors buying PGBs, in particular from Japan with €3.7bn of inflows during that month alone, which is quite significant for the size of our market.’

Benjamin de Forton, a senior debt capital markets origination banker in the public sector team at BNP Paribas, said the overall market environment is ‘extremely positive’. ‘There are two key elements,’ said de Forton. ‘The yield environment is attractive after the strong sell-off since mid-December. That’s driving demand from asset managers and pension funds who see an opportunity to lock in interesting yields. The other thing is that asset swaps have been moving higher. So every investor compartment is keen to step in.’

Amid the strong market environment, Greece and Portugal are two of the shining lights. ‘They now look like developed European sovereigns and the ones showing the example with their deficits under control,’ said de Forton. ‘Both Portugal and Greece are coming with an even smaller spread to Bunds and trading inside France on some tenors.’