* 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 (Reuters) - 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 is over.
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.