Picture: BLOOMBERG/YORGOS KARAHALIS
Picture: BLOOMBERG/YORGOS KARAHALIS

LONDON — Greek government bonds held steady and stocks rose on Monday after Standard and Poor’s raised the country’s rating by one notch to B minus, praising its compliance with the terms of its third bailout.

Greece is still debating its politically sensitive pension reform, a precondition for completing the first bailout review and starting talks on debt restructuring but has prompted a wave of strikes. But the ratings agency expected a compromise to be reached in the coming months.

If successful, the review could potentially lead to the inclusion of Greek bonds in the European Central Bank’s €60bn a month asset purchase programme.

It could also pave the way to debt relief talks with its eurozone partners, which some bondholders would see as a positive development. Although some uncertainty remains, they generally do not expect the talks to include the private sector, which has already taken losses in a 2012 restructuring.

Standard & Poor’s expects Greece’s economy to flat line this year before "a more robust recovery". Greece’s central bank chief on Monday said that while its economy shrank 0.2% in 2015, it has the potential to rebound in 2016 if the first bailout review is speedily concluded.

At the market open at 8.30am GMT, Greek 10-year bond yields fell 10 basis points to as low as 9.44%, having traded above 10% at the end of last week.

Prices were extremely volatile in one of the world’s most illiquid debt markets. They finished the day slightly higher at 9.63%.

"The rating upgrade — I don’t think it was fully priced in by the market, although it’s hard to draw any conclusion about the illiquid Greek bonds," said KBC rate strategist Mathias van der Jeugt.

Only €35m in Greek bonds had traded in the first two weeks of the year on the HDAT platform, according to central bank data.

The trading volumes did not look on track to match December’s €134m, but they were higher than in the whole April-September period of last year, when worries that Greece could crash out of the euro zone reached a climax.

The Athens bourse was up around 1%, while other European stock markets were in the red.

Analysts say Greece remains a market mainly for specialised distressed debt investors, although mainstream names such as PIMCO, BlackRock and Carmignac Gestion have also dipped into that market.

Rating upgrades can improve the market sentiment, but normally trigger forced buying from rating-sensitive investors only when a country moves from "junk" to investment grade, which Greece was still far away from.

Greek CDS prices suggested the market saw a default probability of 57%, according to Markit data. The Greek 10-year bond trades at 64.2 cents in the euro.

"The upgrade is good news, but Greece remains vulnerable," BNP Paribas rate strategist Patrick Jacq said.

Most other eurozone bonds were flat, with little reaction seen to centre-right Marcelo Rebelo de Sousa winning Portugal’s presidential election on Sunday.

Southern European bonds were given a lift last week by European Central Bank President Mario Draghi, who flagged more monetary policy easing for March. But domestic problems could still stand in the way to narrower yield spreads.

German 10-year Bund yields were down 1 basis point at 0.40%.

Reuters