Prime Minister Kyriakos Mitsotakis is expected to arrive in Thessaloniki on Saturday for his keynote speech, while at the same time the country is trying to heal its wounds following the recent floods.
The scenarios for a cabinet reshuffle are ‘on hold’ for the time being, but the disappointment about the weaknesses of the state has increased. In addition, plans for allowances and support measures have been lost in the mud. Priority is now placed on support for the thousands of citizens affected by the floods and on repairing infrastructure that has suffered serious damage. This will be achieved via the redirection of EU funds (not fresh money), as well as a supplementary budget of 600 million euros, which should not, however, endanger the target of a primary surplus of 0.7 % of GDP. In practice, this means that the plans to expand the ‘market pass’ and plans to support low-income pensioners are postponed for 2024.
Among the few positive developments that the prime minister will stress are the upgrades from the rating agencies. Moody’s rating agency is expected to upgrade the Greek economy tonight. Another rating agency DBRS recently upgraded Greece to investment grade (BBB with stable outlook). However, it will be difficult to repeat this success, since Moody’s had cut its rating on Greece to junk territory, three notches below investment grade. Therefore, the best we could hope for is an upgrade by two notches.
What will this mean in practice? A favorable signal to markets at a difficult time when Greek bonds could come under severe pressure, with prices falling and yields rising. Today the yield on the Greek 10-year bond is at 4% – with the market having largely discounted the positive decisions of the rating agencies and now waiting for the next steps of the Greek government, as well as the European Central Bank (ECB).
The ECB raised its key interest rate to a record high of 4% on Thursday but, with the euro zone economy in the doldrums, it signalled that the hike wasn’t likely the last one.
And as money becomes more expensive, the pressure on Greek bonds will intensify. The “counterweight” to avoid a spike in borrowing costs will be the rating agencies’ upgrades based on the reform program and fiscal discipline.
By the end of the year, two more rating agencies, Standard & Poor’s and Fitch, that rate Greece at just below investment grade, are expected to deliver their verdicts on October 20 and December 1, respectively.
