Monday, 23 July 2018

On Greek revivals and Chinese market forces

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  • Anthony Peters

Anthony Peters warns about the Greek bond rally and Beijing’s plans.

There was a time, not so long ago, when going through an entire day without talking about Greece seemed to be a thing of the impossible. We could all see the facts: a bucket load of debt but only a cup full of revenues. Yes, it could, by way of stern austerity, be brought back to delivering an operating profit but as many learnt from investing in the leveraged buy-out business, Ebitda is a fine measure if the ITDA didn’t count, but it does.

Athens is, without a shadow of a doubt, the principal profiteer of “whatever it takes” and the intervention by St Mario has helped it weather the worst of the storms which it was buffeted by in 2011 and 2012. Earlier this year the government proudly announced that it had in fact broken through the seemingly impermeable membrane and is running a primary budget surplus.

With the de facto guarantee of the ECB, 10-year yields had fallen from 18% a year ago to 8% in mid-May. In real money, that had the GGB 2% 2023 rally 31⅝ a year ago today to an interim high of 66¾ in the six months until May, a 188% annualised return which isn’t bad on the bonds of a bankrupt country.

Since then, life in the Greek bond market has not been easy as they collapsed again through mid-July but since then they have been steadily recovering and by the beginning of this month, the bond was flirting with the 70.00 level and a yield below 8% for the first time since the crisis began.

Market volatility has declined sharply – being short Greece has become an expensive game for those who still sport it in their benchmark – so the 2 point drop which it suffered yesterday for a 40bp rise in redemption yield to 8.45% must have come as something of a shock. But why?

Key economic data remain horrid with reported unemployment at 27.6% and youth unemployment at 57.3%. The economy is currently contracting at a reduced rate of 3.8% which has seen per capita GDP fall to below €14,000. To put this in context, Germany has an unemployment rate of 5.2%, a youth unemployment rate of 7.7% and per capita GDP of €37,500.

Dumping Greeks

Nevertheless, the Samaras government is working well and has just survived a confidence vote in parliament as the opposition tried to challenge the maintenance of the austerity programme. But the sudden two-point drop in the price of the 10yr bond yesterday reminds that the market is fickle, that investors are largely holding Greece as a speculative position which they will dump at speed at the first sign of the rally running out of speed, and that there is probably no depth to the backstop bid. This was evidenced during the pull-back between May and July when yields rose from 8% to 11¼% in just a month.

Questioning the viability of the single currency has become near as dammit punishably politically incorrect – unless you write for the Daily Telegraph of course and your initials are “AEP”. The best way to keep the Greek problem out of sight is by steadfastly looking West which the Americans with their Capitol Hill shenanigans have of late made particularly easy.

There is little doubt that the data in the Eurozone are looking better – they really couldn’t get much worse – and as Bill Blain of Mint Securities never tires of reminding us, the rest of the world is in decent and sustainable growth mode even though that sort of recovery in “Yurop” seems a way away.

The late Winston Spencer Churchill used to refer to Greece as part of the “soft underbelly of Europe”, albeit in his case he was thinking in military terms. That, I believe, it remains. Please don’t get me wrong; I am not questioning Prime Minister Samaras and his New Democracy led coalition but even the strongest of strong men can only push a car which is out of fuel so far and no further. I am honest enough to admit that I would most likely have missed the entire Greek bond rally to date but I fail to see where it can go from here.

Passé central planning

Meanwhile, the Chinese leadership has completed its economic plenum and the outcome, though not detailed, appears to point to a greater opening of the economy to market forces and a reduced reliance on central planning with the concomitant allocation of capital and resources. This is not what we want to hear, for the property bubble has largely been sustained by the lack of alternative investments. If the economy achieves escape velocity and seeks a different orbit than the one it has been in for all these years, then Sixpack Li’s reliance on property as a store of wealth might fade causing a mark to market of buy-to-let across China.

I am reminded of my great friend Raja Visweswaran, now of Deutsche in Hong Kong, who was sent a decade ago to assess his then employer’s property lending in booming Thailand. He did this by taking a taxi ride through the new, glossy residential suburbs after dark to see how many of these wonderful new condominiums had lights on. He came back to recommend a sharp withdrawal from that market. Nobody listened – bankers were still being measured by how many loans they gave out, not by how many were being repaid – and the bank took a major bath when the wheels came off.

The opening of the Chinese economy is probably the greatest single risk which it could impose on itself. Worth a thought? 

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