Joseph Mariathasan: Greece – is there hope?
Greece has successfully returned to the international bond markets and Standard & Poor’s has upgraded its ratings outlook on the country from stable to positive.
But what is there beyond government debt? Amid the ongoing anguish of Greece, there do lie attractive investment opportunities. Finding them within an economy scarred by a history of dysfunctional politics is the challenge.
A view expressed by many Greeks, including entrepreneur Markos Tsimikalis, is that the euro is the best thing that has happened to Greece. As he argues, it enabled an independent regulatory framework and it cut off the central bank from the claws of the Greek political system.
Many Greeks would agree with him. They recognise that Greece has structural problems that its post-war governments have never been able to solve, such as corruption and tax evasion, that make it closer to an emerging market than a developed.
“Italy also has a political elite that is used to milking the system, but it has a chance to succeed because it has industry,” says Tsimikalis. “Greece always had corruption but it does not have industry.”
What Greece does have, as microelectronics engineer Apostolos Samelis explains, is arguably an overweight public sector with employment secured by the constitution. When the socialist government in 2010 conducted a census, it found that it was employing almost a fifth of the country’s 4.2m workforce. That is a legacy of labour unions protesting a century ago at unjust dismissals whenever a government changed, at a place in Athens now called Plateia Klafthmonos – the Square of Tears. The protests and tears resulted in jobs for life for civil servants and a focus thereafter by ambitious parents on securing public sector jobs for their children to provide security.
Salaries and pensions in the Greek public sector do look unjustifiably high compared to the private sector and disproportionally high in relation to other EU countries, even after the hefty austerity cuts. It could be argued that the public sector overcommits public resources for its own benefit.
However, as Samelis points out, in the present stagnant economy it cannot be overlooked that state salaries and pensions support many households, especially those hit by unemployment. Inevitably, in an economy that does not generate new wealth, further reductions of public expenditure will hit the weakest the most. This has been one of the sticky issues prohibiting swift conclusion of negotiations between international lenders and all recent Greek governments.
It is easy to dismiss Greece as only a place for tourists – numbers have certainly increased significantly along with hotel prices in the wake of the crises in neighbouring countries. Yet, for Giuseppe di Mino, managing director at Amber Capital, Greece is probably the safest place to invest in Europe because it has come full circle. It has gone from a socialist to a conservative-liberal government, then to populism. If there is an election next year, it is very likely that the centre-right party will come back to power.
As di Mino argues, Greece has tried all the different political colours and flavours and is now back to square one. The most important thing, however, is that during this time Greece was forced to pass a lot of structural reforms. It is the country that has reformed the most in Europe because it was forced to. The economy suffered a 25%-plus decline in economic output since 2010.
“We think once we have political stabilisation and the completion of the third bail out problem next year the economy could rebound very quickly,” di Mino says.
The investment opportunities that Amber finds in Greece are predominantly in equity rather than credit, says di Mino. The simple reason is that most of the debt in what used to be highly leveraged sectors such as banking has been restructured and converted into equity. In Greece, there are very few private corporate bonds in the market. Some have been repaid and some equitised. In addition, during the last few years, very few corporates have issued new debt because the yields are too expensive.
A key element of any restructuring within the Greek economy is the banking sector. There has been a natural consolidation in the sector, with the original 10-15 banks now reduced to only four, with others merged or dissolved.
“You see an oligopoly now in a country with a 25% decline in GDP and where credit creation has been decimated over the past seven years” says di Mino.
The main challenge, he argues, is how well banks can manage their non-performing loan portfolios, which account for more than 50% of assets. “They are effectively running a bad bank,” he says.
What are Greece’s competitive industries besides tourism? Samelis and Tsimikalis argue that Greece has a readily deployable and highly-skilled labour force in science, medicine and engineering that makes it easy for multinationals like Apple and Google to potentially open up design centres in Greece.
One example Tsimikalis gives is Customedialabs. The company has its head office in Philadelphia but all the development is undertaken in Larisa, Greece, where they employ a large number of developers, marketers and programmers who produce sophisticated digital content for their US clients.
Greece’s geographic location also gives it some unique advantages. The port of Piraeus looks set to play a key role in China’s “one belt one road” strategy. Chinese shipping company COSCO acquired the Piraeus Port Authority in August 2016 which should accelerate its role as a leading harbour in the Mediterranean.
Greece is an area that could be very attractive once there is stabilisation in the political environment. For investors, and for the Greek population, that is a welcome thought.