Time to Bet on a Greekovery?

(Originally published here.)

This may not seem like the best time to invest in Greece. The economy has shrunk by more than one-fifth since 2008 and, if private forecasters surveyed by Bloomberg are correct, will see a cumulative decline of 25 percent over seven years — a catastrophe no rich country has experienced in peacetime since the Great Depression.

On the other hand, as Baron Rothschild put it, the best buying opportunities present themselves “when there is blood in the streets.” Those who purchased 30-year Greek government bonds last July (such as Dan Loeb’s Third Point) have quadrupled their money. Greek share prices have doubled over the past 12 months.

Does this mean the best bets have already been made? Greek equity prices are still more than 80 percent below their 2007 peak. If a so-called Greekovery materializes, there is plenty of potential for appreciation in a range of asset classes. So, is Greece’s economy set for a turnaround?

My colleague Megan Green doesn’t think so. Yet the bullish case was made pretty forcefully on June 5 at the Greek Investment Forum in New York City, which I attended. There were two main arguments. First, fiscal tightening, which has done so much to exacerbate the downturn, is set to come to an end sometime in the next year. Christos Staikouras, the alternate minister of finance, noted that this was the largest and fastest budget consolidation ever recorded: Government spending has dropped more than 21 percent since 2009. The International Monetary Fund now forecasts that Greece will have the largest structural budget surplus in the rich world by 2014.

The other bullish argument is that the Greek government has addressed many of the country’s “structural imbalances.” According to the Organization for Economic Cooperation and Development, Greece has begun more significant reforms than any other rich country over the past few years, and the World Bank ranked Greece eighth in its “most improved in doing business” survey.

Greece’s labor market is now the most flexible in the euro area, although the evidence for this was the fact that the share of workers employed part-time had doubled from 17 percent in 2009 to 35 percent today. And while unemployment and wage cuts have devastated Greek workers, they have done much to close the competitiveness gap. According to Michael Massourakis, a senior economist at Greece’s Alpha Bank, Greek labor costs have plunged by 24 percent relative to Germany since 2009. The current account deficit has shrunk from more than 15 percent of GDP to 3.4 percent.

The hope is that these changes will attract new business investment to offset the contraction in government and consumer spending. The question is how such investment will be financed. As Massourakis put it, “all the improvement in the world won’t help unless liquidity returns.” The receding risk of a Greek exit from the euro area has already made it somewhat easier for firms to get financing, although this hasn’t done much to help the small businesses that comprise the vast bulk of the Greek economy.

The good news is that Greece’s banks are in the midst of getting cleaned up with the help of 50 billion euros from the creditor “troika” — the European Central Bank, the European Commission and the IMF — as compensation for last year’s sovereign debt write-down, which disproportionately affected Greek lenders. The ECB has also said that it is working on ways to improve the transmission of its liquidity operations to small firms.

Massourakis argued that capital will return to the country and finance a robust expansion once people regain belief that Greece is fixed. Encouragingly, bank deposits have finally stopped leaving Greece, although they are still about one-third below peak levels.

Total Retail and Corporate Deposits in Greece (Source: ECB)Total Retail and Corporate Deposits in Greece (Source: ECB)

At the same time, the European Commission’s measure of “economic sentiment” in Greece has soared since last fall. For the first time in years, Greeks are now more optimistic than the euro area as a whole.

Source: European Commission; Chart: Bloomberg ViewHedge funds and private equity firms have responded by buying up Greek companies, while several large multinationals have made serious investments. Robert van Peppalendam, the head of Proctor & Gamble’s Greek operations, said he recently opened a new research center in the heart of Athens to take advantage of the cheap, well-educated workforce. John Frasca, the head of logistics at Hewlett-Packard, said that the newly improved port of Piraeus was an ideal hub for its electronics shipments from China, far more efficient than the old routes to Rotterdam and Hamburg. He also noted that H-P was interested in assembling some products near Piraeus and exporting them to the rest of Europe after importing the necessary components from factories in China and Turkey.

Despite all these reasons for cautious optimism, I still have some doubts. Daniele Antonucci, an economist at Morgan Stanley, said he thought Greece would eventually grow at an annual rate of about 2.8 percent starting in 2015 and continue on that path. He was trying to be upbeat, noting that this was faster than the trend growth rate for the rest of Europe. Yet his projection implies that Greek GDP will not return to its 2007 level until sometime in the late 2020s. Unless the ECB and the German-led euro area “core” acts decisively, Greeks will have little choice but to be patient. But will investors wait that long?

(Matthew C. Klein is a contributor to the Ticker. Follow him on Twitter.)


About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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