* 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
(Updates prices into close, adds fresh comments)
By Emelia Sithole-Matarise
LONDON, March 21 Greek bond yields fell on
Friday after Standard & Poor's said it may raise the country's
credit ratings if growth picks 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.
Moody's, which rates Greece Caa3, two notches below S&P's
B-, is due to make its review on April 4. New European rules
require ratings agencies to lay out the dates on which they
review a country's ratings.
S&P's 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 this year in its bond yields to near four-year
lows, driven by investors' hunt for higher returns in euro zone
debt as the region's crisis eased, is also prompting Greece to
consider selling its first bond since it was bailed out in 2010.
"If you're looking for a yield grab, and many people are,
then Greece is still the highest yielding (in the euro zone),"
said Alan McQuaid, chief economist at Merrion Stockbrokers in
Dublin. "The market seems to be opening up for them."
Greek 10-year yields fell 6 basis points on
the day to 6.93 percent. They are slightly off four-year lows of
6.61 percent hit earlier this month, but still at levels last
seen before the bailout, suggesting improved investor 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. One source told Reuters it
might issue a five-year bond in the next few months.
Many of its primary dealers say the sooner Greece returns to
bond markets the better, as demand from yield-hungry investors
ramps up, and a deal could even come before European elections
Some analysts expect Moody's to raise Greece's credit rating
from the current Caa3, which still assumes a significant risk of
"Moody's current rating still gives a substantial default
probability, but this has come down quite substantially," said
ING strategist Alessandor Giansanti. "The share of private debt
holders is very small, so it becomes a bit pointless to ask them
for another debt restructuring after the restructure in 2012."
Risks still remain. Despite their rally, 10-year Greek
yields are still above their longer-dated counterparts. A yield
curve that inverts like that usually points to debt investors
fearing they might not be repaid in full.
Greece's high debt, about 175 percent of the country's gross
domestic product, remains unsustainable, and if the economic
recovery stalls, investor sentiment could quickly sour, analysts
"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 steady to slightly lower as
the market stabilised from Thursday's sharp sell-off a day after
Federal Reserve Chair Janet Yellen signaled the central bank
might raise U.S. interest rates sooner than initially thought.
German Bund yields, the benchmark for euro
zone borrowing costs, fell 1 bps to 1.63 percent.
(Additional reporting by Marius Zaharia; Editing by Larry King)