* S&P affirms Greece's B-/B rating with stable outlook
* Ratings could be raised if growth picks up substantially
* Rest of market slightly firmer after Fed-led sell-off
By Emelia Sithole-Matarise
LONDON, March 21 Greek bond yields dipped on
Friday after Standard & Poor's said it could raise Greece's
credit ratings if GDP growth were to pick up more substantially,
after keeping them deep in junk territory with a stable outlook.
Standard & Poor's said it believed the country's economy was
gradually rebalancing, adding the stable outlook assumed no
further distressed exchange of Greek debt.
The positive comments are the latest upbeat news for the
debt-laden southern European country, which this week clinched a
deal for the release of further aid funds after negotiations
with the European Union and the International Monetary Fund.
A sharp fall in its government bond yields near four-year
lows, as investors hunt for higher returns in euro zone debt as
the region's debt crisis eases, has also prompted Greece to
consider selling its first bond since it was bailed out in 2010.
"These relatively constructive comments out of S&P today
plus the fact that they will get their latest loan tranche as
well and the talk they might test the market with a
shorter-dated bond issue in the first half is all positive for
Greece," said ICAP strategsit Philip Tyson.
"There's definitely a window for Greek yields to further
contract and spreads to narrow ... but there's still some
fundamental issues for Greece if growth disappoints," he said.
Greek 10-year yields were last 3 basis points
lower at 6.96 percent, tentatively resuming a downward move that
pushed the yields near four-year lows early this week.
Greek bonds still offer higher yields than the rest of the
euro zone but their current pre-bailout levels suggest improved
confidence that the worst of the region's sovereign debt crisis
The improved market tone is leading some Greek officials to
consider issuing bonds earlier than the second half of the year
that Athens had initially flagged, with a source telling Reuters
it could issue a five-year bond in the next few months.
Many of its primary dealers say the earlier Greece returns
to bond markets, the better, as demand from yield-hungry
investors ramps up, and a deal could even come before European
elections in May.
Risks still remain. Despite their sharp rally, 10-year Greek
yields are still above their longer-dated counterparts. A yield
curve that inverts like this usually points to debt investors
fearing they might not be repaid in full.
Greece's high debt level of about 175 percent of the
country's gross domestic product remained unsustainable and if
the economic recovery stalls and deflation takes hold, investor
sentiment could quickly sour, analysts said.
"A new issue in the market would be positive for the country
and for spreads, showing strength," RBS strategists said in a
note. "However, it will take longer to solve Greece's problems
in the real economy, and debt relief discussions will be key,
which are currently planned for August."
Other euro zone bond yields were also slightly lower as the
market stabilised after the previous day's sharp sell-off after
Federal Reserve Chair Janet Yellen signaled the central bank
might raise U.S. interest rates sooner than initially thought.