Emerging Markets: Investors finally ready to look at Greece again

Emerging Markets World Bank editions, October 2013

Improved sentiment towards the Eurozone has triggered the first signs of investors being willing to look afresh at the market that prompted the crisis in the first place: Greece.

This week Deutsche Bank’s strategist for government bonds and swaps, Lionel Melin, outlined a complex strategy for investors to position themselves for an eventual recovery in Greek government bonds.

Melin wrote this week: “We suggest an investment strategy profiting from the mean reversion in curvature of the GGB curve while immunizing against probability of default and recovery rate co-movements.” Explaining what this means takes several pages of technical data, but in essence, it hinges on the idea that, following last year’s debt swap deal, all 20 outstanding Greek government bonds are identical securities until February 2023 when the first bond amortizes. After that, as each year one bond reaches maturity, the probability of default declines. The bank suggests focusing holdings at the centre of the Greek curve, specifically a mix of bonds maturing in 2028 and 2031, as a way of outperforming the sector as a whole.

“More economic and political developments are awaited in the near future in Greece, with an economy getting closer and closer to the trough,” said Melin. “Our outright view of the Greek privately held debt is at this point rather optimistic from its relatively contained size [10% of total debt], and the affirmed willingness of the Greek government to gain back access to markets.”

Melin also noted that the Greek GDP warrant is now 22% undervalued compared to the strip of bonds (that is, the average price investors are willing to pay for outstanding Greek government debt). “The scale of this mis-match may be an over-estimation of the potential gain,” but “some upward repricing is likely,” Melin said.

Melin’s view represent a technical method of profit rather than an endorsement of Greece as a whole, but does reflect a cautious willingness of some investment advisors to at least look at the country.

However, those looking at the Greek economy overall tend to remain negative. Roubini Global Economics last week revised up its 2014 growth forecasts on the back of a good tourist season, but said: “Given the weak state of the external environment and domestic demand, we maintain our overall bearish views on Greek growth.” It noted uncertainty about Eurozone growth, continuing political risk and fiscal policy uncertainty, and depressed private demand with many households having few resources left in reserve with which to buy anything. Others highlight Greece’s 28% unemployment rate.

A brighter view can be gleaned from the capital markets, where the stock market has doubled since its low point in 2012, banks are recapitalized and the high yield market has shown willingness to back Greek deals, most recently a Eu400 million unrated four-year bond for the takeover of a 33% stake in OPAP, the Greek state lottery and football betting operator, by a Czech and a Greek business magnate. While the bond was not cheap – a Eu250 million first lien tranche yielded 8.5%, and a Eu150 million second lien security came with a 12.58% yield – there was some surprise in the market that an unrated Greek deal could be completed at all. The deal supports the largest privatisation in Greece this year.