Time Heals Greece

Alone among the countries in the European Union that were bailed out following the global crash in 2008, Greece continues to operate subject to the terms of its multi-lateral assistance contract.  This contract, its third in a series of contentious ‘bail outs’ that tested the viability of the European Union, is set to end in August 2018.

Greece’s recent economic data and bond yields indicate a promising prognosis for successful exit and a return to a normal level of prosperity.

Greece has recorded three consecutive quarters of growth in 2017 for the first time since the crisis. Unemployment, though high at above 20%, has fallen significantly from a peak of near 28%.  Greece’s government is spending less than it takes in, ignoring debt payments.

As for its debt, it is still decidedly less than investment grade.  However, Moody’s, Standard & Poor’s and Fitch all upgraded Greece’s sovereign debt this past year and all maintain positive outlooks.

The market too has noticed Greece’s progress and applauded it with cash.  Greece returned to the sovereign bond market in 2017 after a three-year hiatus and was able to issue €3 billion in an oversubscribed offering.  Yields on outstanding Greek ten-year bonds have fallen below 6%.

Greek banks have been able to return to the capital markets as well.  Greece’s National Bank, Eurobank Ergasias, and Piraeus Bank have all successfully issued bonds in recent months.  It must be noted that these bonds were ‘covered’ i.e. backed by collateral.  Nonetheless, this is in keeping with the bailout protocol and an important first step in creating a pathway back to the type of regular access to the capital markets that every banking system needs.

Greece’s economy has a long way to go to repair the damage done by the crisis.  Non-performing loans in the banking system are still very high.  Further, the system for liquidation and resolution of these loans has not worked nearly so well as, for instance, similar efforts in the United States (e.g. The Resolution Trust Corporation).  Civil law notaries in Greece, who are on the front lines of enforcing terms with debtors, have been on strike often in the past year due to fears for their personal safety.  Debt and collateral auctions have also been routinely cancelled due to fears of public disorder.  However, knowledgeable observers say that this system should improve as more auctions are moved to electronic formats and the virtuous circle of an improving economy provides debtors with new opportunities for prosperity.

Greece’s recent past makes it is easy to be skeptical about prospects for its near future.  However, skeptics would do well to consider that a mere generation ago Greece was the land of the “Greek economic miracle.”  The rate of Greece’s post World War II economic growth, up to the year 1973, was first in Europe and second globally only to Japan.  Economic growth during those years averaged 7.7% and export growth averaged 12.6% annually.

Recent reported yields on Greek sovereign bonds indicate that bond investors have had a remarkably good run in Greece, riding the price rise commensurate with a yield drop from over 18% in July of 2015 to a recent 5.54%.  [These theoretical gains are easy to over-estimate because the details of maturity extensions, liquidity and hedging costs, and margin availability are unknown.]

However, the yields and ratings on Greek sovereign and bank debt are still realistically high, reflecting Greece’s status as a country still on the mend and in need of financial assistance.  But a bailout exit, which once seem far- fetched, now appears likely. Patient investors with the stomach for a little risk might do well to consider betting on it.

About Chris Donnelly

Christopher J. Donnelly, is an experienced attorney, bond analyst and fixed income strategist, with years of experience in structured finance, distressed bonds and bond related litigation in a variety of industries and the emerging markets. He is a graduate of Rutgers University (BA), The University of Pennsylvania (JD) and New York University, (LLM in Taxation). Chris is a Managing Director of Straacom, LLC and can be contacted at cdonnelly@straacom.com. Straacom provides strategic research, analysis and communications for publication and on assignment for private clients.

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