Greece lightning… will it strike twice?

Lightning over the Acropolis

Covid-19 will impact Greek tourism, but with strong PMI figures in 2019 and a new stable government, hedge funds such as Greylock Capital see long-term opportunities in the country; in particular Greek debt and real estate. Hopefully, the storm that ensued from its debt crisis in 2010 will not be repeated.

Greece is showing signs of coming through its debt crisis. Last year, the IHS Markit Manufacturing PMI figure for Greece was the highest since 2000 and also the highest of all 31 countries covered by IHS Markit’s surveys. In sharp contrast, Germany, Greece’s bête noire during the debt crisis, reported the lowest average PMI worldwide last year.

Since 2017, Greece’s manufacturing sector has enjoyed sustained growth and with a newly appointed conservative government led by Prime Minister Kyriakos Mitsotakis, there are plans to cut taxes for businesses and increase social spending; although the impact of Covid-19 will undoubtedly put this on hold over the short term. 

US hedge fund Greylock Capital has long been involved in Greece, in varying capacities and although in recent weeks it has reduced its exposure, the firm still sees long-term opportunities.

“We were the only US asset manager to be invited onto the steering committee for the Greek debt restructuring program,” says Anthony Antonelli, Director, Research/Macro at Greylock Capital. “We always believed in the prospects of Greece moving forward, which overnight went from being a developed to a developing country; they had low wages, low employment and many other things following the crisis that sowed the seeds for recovery.” 

Fitch credit upgrade 

Investors looking at Greece to seek out higher yielding opportunities in its equity and credit markets were buoyed in January 2020 when Fitch upgraded the country’s credit rating to BB. Confidence in Greek bonds was demonstrated when 10-year borrowing costs dipped to a record low and below 1 per cent for the first time, as investors sought positive yields. 

“With Covid-19, things have changed dramatically in a short period of time. While I do suspect that Greece will come out of this and there will be significant buying opportunities in the future, the reality is its economy is still 20 per cent reliant on tourism; and global tourism has come to a screeching halt,” says Antonelli. 

He says that to invest in Greece long term, Greylock Capital prefers to focus on the fixed income space because a) you get paid to wait, with some bonds currently way below face value, and b) if and when things turn around, Greek bonds will head back to par, whereas equities might have a much longer recovery. 

“Piraeus Bank’s bonds are currently trading at 47 cents on the dollar, with a yield of around 25 per cent,” observes Antonelli, who also points out the attraction of Greek real estate: 

“We view the banks as a kind of leveraged play on the Greek real estate recovery, given that they own a lot of real estate assets. Prices in Greece relative to other parts of Europe are relatively cheap. Anything related to Greek real estate is going to be a good longer-term investment, in our view.”

Other hedge funds share a similar view. 

Chenavari Investment Managers, a leading European investment manager focused on credit markets, announced yesterday (19th March) that it had agreed to acquire 18 properties in central Athens to form a unique prime Greek real estate portfolio. 

Following the 2008 financial crash Greece was exposed for its lack of fiscal discipline and extortionate level of sovereign debt, which threatened the very existence of the Eurozone. Since 2010, Greece has been loaned approximately EUR320 billion. 

With the encouraging PMI figures and improved credit rating, hopefully lightening won’t strike twice and having learned the painful lessons of the last decade, Greece can continue to strike a path towards more sustained economic growth. 

Longstanding structural issues remain

But the country is far from being out of the woods.

“There are still longstanding structural issues that Greece needs to address,” says Chris Williamson, Chief Business Economist, IHS Markit. “The tax reform, for example, still has a long way to go. Tax revenues are still likely to disappoint, and the country continues to struggle to reduce the amount of cash used in the economy. 

“We would argue that investors were too slow to move in to Greece last year. 

"Now, there is increasing concern over how the coronavirus could dent its economic performance, especially in terms of tourism and Greece’s domestic food and beverage industry.”

Whether Williamson is right and investors were too slow to move last year is open to debate but it is unavoidable that coronavirus will have, at the very least, a short-term impact on Greece’s economy. 

Discussing the 2019 PMI figures, Siân Jones, Economist, IHS Markit, says:

“In terms of the wider Greek manufacturing sector, over the last 20 years we’ve seen a real increase in the amount that exports are contributing to Greece’s GDP. In 2018, exports contributed to 36 per cent of GDP, whereas in 1998 they only contributed 16 per cent; so you can see the extent to which that contribution has grown. 

“In 2018, around half of Greece’s exports came from the manufacturing sector. The export numbers were really strong over 2019 and through February this year. Elsewhere in the Eurozone, the outlook was not as attractive in 2019 in terms of its export data.”

One of the fastest areas of global demand growth for Greece’s exports has been in areas such as food and drink and consumer goods. In Jones’s view, the work Greece has done in recent years to restructure its economy to be more efficient and productive “is now beginning to pay dividends”. 

By contrast, Germany was the polar opposite to Greece in terms of manufacturing demand in 2019. 

“It had the worst of both worlds,” says Williamson. “It was hit especially badly because some of the biggest downturns that we’ve seen, globally, are in relation to demand for autos and demand for business equipment and machinery; two areas that Germany specialises in.”

He points out two factors in play regarding the recent improved fortunes in Greece’s economy.

“As the country’s fortunes have turned around there has been a big upswing in investor sentiment towards the country. Also, there is an ongoing search for yield. Greece is one of those countries where investors are considering investing again in Greek bonds. It’s therefore not just about the country’s improved fortunes; it is exacerbated by this hunt for yield.”

Greek banks won’t fail

In the last couple of weeks, those yield opportunities have spiked higher as Europe has become the global centre of the coronavirus pandemic. 

On 18th March, 10-year Greek Government Bonds rose to 3.94 per cent before the ECB announced it would allow GGBs to be purchased as part of its QE program. This has since seen GGB yields fall back to 2.5 per cent.  

“We reduced our exposure a couple of weeks ago in the belief we will get better buying opportunities,” explains Antonelli. “Greek banks were on a recovery trajectory, and unfortunately this current situation means they are probably going to see a new wave of bad loans. However, they now have more tools in place to combat this and both the ECB and the Greek government are giving them more leeway. So we don’t think Greek banks will fail this time around.”

For the time it takes QE to filter through into European markets, it is likely that some credit securities will fall further still before they show signs of improvement. This is a time for investors to wait and identify the best entry point for holding Greek debt. 

"Up until recently we were forecasting 2.4 per cent GDP growth for the next couple of years,” says Williamson. “Even before the coronavirus struck there were question marks over whether the economy can sustain strong growth without running in to employment and investment constraints.
"The coronavirus will impact Greece’s economy hard, especially travel and tourism.”

Jones confirms that they have revised their forecast to -0.7 per cent, noting that 10 per cent of exports go to Italy, the worst hit country in the fight against the virus.

So could lightning strike twice and see Greece reduced to ruins as was seen in 2010, or will the new government steer the economy successfully on the back of last year’s strong PMI figures? 

Antonelli is sanguine about its prospects:

“The bottom line is Greece has come a long way. They’ve gotten their act together in a way that has probably surprised a lot of people. I expect them to manage through the crisis and to get back on the path to recovery.” 

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James Williams
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