Monday, 16 July 2018

On Greater Greece

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Anthony Peters on how Greek paper might be a buy (with caveats). 

I came in this morning to find a note on one of the fine overnight summaries I receive from various banks. This one read simply: ”Greece: PM Samaras reiterated the economy will return to growth this year after six years in recession. He promises tax cuts after achieving fiscal targets.”

Six years of recession is a pretty hard pill to swallow but I was interested what that looked like in real numbers. Fortuitously, I found a chart based on World Bank figures which measures Greece’s nominal annual GDP in current US dollars and what I found surprised me enough to wish to share it. I need to add, for completeness’ sake, that the 2013 final figure has not been added yet but we can surely safely assume that it will be lower.

So now for the big question. If Greece was a bad buy at 37%, is it a good one at 7.82%?

Starting with the obvious, Greece, at the peak and before it was found out, recorded a gross domestic product of US$341.6 for the year ending December 31 2008. As the crisis kicked in and as it became the focal point of the eurozone crisis, it dropped to US$321bn in 2009, US$292bn in 2010, US$289bn in 2011 and finally to US$249bn in 2012. I can see no better way of demonstrating just how devastating the recession has been for the country. This amounts to a decline in GDP of 27% over a four-year period or 7.59% annually.

However, in the four years running up to 2008, the declared output had risen from US$227bn as at year end 2004 which represents an increase of a whopping 49.85% or annual growth of 10.63%. In fact, if we go back to the end of the year 2000, that number is US$124bn. Based on that, Greece’s economy had grown by 175% in 8 years or by an annual rate of 13.45%.

If we turn that round and look what the economy has done between 2000 and 2012, we find it to have, after the recession, still doubled in size from US$124bn to US$249bn leaving a still mightily impressive annualised growth rate of just under 6% annually.

Beating Berlin

Over that same eight-year period and using the same World Bank numeric series, the German economy has grown by 25.75% or 2.9% annually. On that basis and using directly comparable numbers, Greece has significantly outpaced Germany and it could be argued that, other than the shock of blowing the froth off an overheated economy, the former has nothing at all to complain about. Reality for the man on the street is very different and I have tracked the travails and efforts of family friends in Greece to come to terms with and to make the best of the altered state.

Although Prime Minister Samaras is promising renewed growth this year and is lauding the return of a primary fiscal surplus, anyone who has managed a company or analysed it will know that operating profits mean little before costs.

Private equity introduced us to Ebitda, which neatly proved that the company in question made money before they had bought it and loaded the balance sheet with huge debt. But we don’t need fancy acronyms to tell us that if we didn’t have a mortgage, a car loan and children to feed and educate, we’d be living the life of O’Reilly. The difference is simply that private equity would not only value the house and the car for sale but the kiddies too. I digress.

Greece might well be bottoming out and returning to growth but it remains an economic basket case on EU life support and will do so, one would have to assume, well beyond our life times and those of our children, should they not have already been sold for cash by the private equity guy next door.

Ten-year Greek yields are now 7.82%, down from 12.85% a year ago and from 37% at the depth of the crisis just two years back in early 2012. In fact, they are now not far off the highest levels we saw Spanish 10-year Bonos and Italian 10-year BTPs trading at when they had their great Cartesian moments in the summer of 2012.

So now for the big question. If Greece was a bad buy at 37%, is it a good one at 7.82%?

The past two years have shown that in all credit markets there is no more risk – or at least none which is priced – and that long everything and anything is the new normal. I dined last night with an old chum and fully paid up member of the equity tribe who some years ago coined the phrase of bonds being for girls. He acknowledged yesterday that CoCo owners are now ranked below equity holders and that even for him that kind of risk exposure is not a girlie position.

2014 doesn’t look like a year in which things can go too wrong, so owning Greece is not to be sneezed at. However, the skill will be in the timing of getting out again and I know few, if any, who ever get that right. Above all, remember to stick a note on the wall above your desk that reads:

“There’s no such thing as a bad credit, just a wrong price.”

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