We may hear it all the time, but how important is the famous one for each one of us investment grade and how can it be explained in simple words?
A new phrase has entered our daily life. For economists, of course, it has always been at the center of their attention and analyses. The same for investors, but above all for those who are in charge of a country’s economic policy.
This is the investment grade. But how is it defined, in simple understandable terms, for an average citizen and small and medium-sized entrepreneur? How many classifications does the investment grade have and by whom are they determined? After all, why should a simple household and a small business be interested?
Investment grade is the level of a country’s credit rating above which there is a relatively low risk of default for its government entity. Ratings above this level make the country an attractive investment destination, while below it reflect a low credit rating.
Each credit rating essentially signals to a lender or investor the likelihood that the country issuing a bond will be able to meet its debt obligations without the risk of default.
Therefore, credit ratings are also used to determine risk reinsurance premiums, now known spreads, and consequently interest rates on securities issued, as well as the amount of collateral that may be required to grant a loan.
Who determines it – The ratings
The credit rating of an economy is carried out by international rating agencies such as Moody’s, Standard and Poor’s and Fitch at regular intervals.
One could say that credit rating reports reflect investors’ expectations about the ability of a country and an economy as a whole to meet its future obligations.
Credit ratings are coded by letters of the alphabet (eg Aaa corresponds to the highest rating in Moody’s rating system), and each is usually computationally associated with a range of default probabilities.
What factors are evaluated?
Credit rating agencies take into account the broader economic and political environment of a country in order to assign it a credit rating.
In particular, as Panagiotis Kapopoulos, the Chief Economist of Alpha Bank, told APE/MPE and journalist Alekos Lidorikis, the factors that rating agencies examine in order to rank the creditworthiness of an economy in a certain level include, among others, political stability, macroeconomic situation (unemployment, inflation, volatility of exports or their dependence on a product, etc.), the growth dynamics of the economy, the effectiveness of the government’s economic policy, the performance of public finances (tax revenues and government expenditures) and sustainability of public debt, the external balance, as well as the quality of institutions (e.g. health, education, judicial system).
In addition, for countries like Greece that are on a path to achieving investment grade, the progress of structural reforms plays an important role, as does compliance with the fiscal targets that have been set.
At this point, as the Chief Economist of Alpha Bank emphasizes, it is worth dwelling on it. “In the case of Greece, the reduction in the ratio of public debt to GDP as a combined result of strong economic growth, high inflation and a rapid return to surplus management as well as the high expectations of the markets for the inflow of funds from the Recovery and Resilience Fund , accelerate, among other factors, the recovery of the investment grade within 2023. In addition, the results of the national elections in May consolidated a scene of political stability as reflected in the rise of the general index in the Greek stock market, but also in the performance of the ten-year bond which is now lower than that of Italy”, he characteristically notes.
The interdependence of the course of the economy and investments from the investment level
“The upgrade of a country to the investment grade is therefore an important milestone, as it is not a simple transition to a higher category of credit surface of the rating agencies, but it constitutes its inclusion among a group of countries whose undertaking of investment initiatives is tolerated at a reasonable level of undertaking risks”, estimates Mr. Kapopoulos.
Thus, the recovery of the investment grade will be a milestone for the Greek economy, not only because it repositions the country as an investment destination for long-term return funds, but also because it creates particularly favorable liquidity conditions for the Greek State, banks, insurance funds and, above all, households and businesses.
“This fact becomes even more important as we are going through a phase of rising interest rates internationally as a result of interventions by central banks to contain the strong inflationary pressures arising from the fiscal expansion on both sides of the Atlantic on the one hand and from the rise of energy prices”, he adds.
When asked if the question of the investment level also concerns the simple household and the small and medium-sized entrepreneur, Kapopoulos emphasizes: “Of course. The upgrade of the credit surface of the Greek State will reduce the cost of raising capital for Greek financial institutions. Cheaper borrowing for banks will be passed on to businesses and households, reducing borrowing costs for them as well, significantly softening the effect of the ECB’s contractionary monetary policy.”
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