* 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 (Reuters) - 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 in May.
Some analysts expect Moody’s to raise Greece’s credit rating from the current Caa3, which still assumes a significant risk of default.
“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 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 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)