Emerging market debt managers are brave souls. Take Thomas Brund of Sydinvest, one of the managers featured in this month's strategy review, who deliberately bought the Ivory Coast before it defaulted. "We were happy to take that default to make sure we were well-positioned for the upside," he explains.
It is, therefore, intriguing that another of our featured managers, GMO, holds some Greek paper in its EMD portfolio. Recently, I heard Julian Adams of EMD hedge fund Adelante Asset Management spend more than half of a presentation discussing Greece - he had also bought a small position just before June's election.
Greece shouldn't be categorised as an emerging market just because it's a basket case, but it seems that, as the traditional investors melted away - interest rate traders get disoriented when rising yields don't signal more demand - public authorities and local banks have been left holding most peripheral debt, with a market being made on the margins by hedge funds and EMD portfolios. As another of our featured managers puts it: "Argentina was Greece long before Greece was Greece."
Unfortunately, the Argentina comparison suggests this story has some way to run. The last time it restructured, its bonds traded at a recovery value of about 45 cents on the dollar. Now look at the Greek bonds issued after the 53.5% haircut: the 2023 trades at 19.6 cents on the euro (yielding 24.5%), and the 2042 trades at just 14.3 cents.
As all EMD veterans know, most sovereign restructuring - from Russia to Iraq via Nigeria - has involved London and Paris Club members agreeing together on an appropriate haircut. With Greece, the public sector has yet to take a hit - and the market clearly feels it's just a matter of time. After all, the country's debt-to-GDP ratio is still an unsustainable 160%, way off the 60-70% post-Brady Plan levels that allowed emerging economies to return to growth.
One might say Greece is still in its Baker Plan phase, with new money being pumped in to fund growth as domestic austerity takes hold, putting off the date of real, Brady-style restructuring. The only reason we are following the same timetable again seems to be reluctance to recognise the parallels. Adams sees this even in the process of the restructure: while the new Greek bonds do at least trade as a strip, authorities might have attracted more liquidity by following the emerging market practice of issuing massively in one or two bonds. "We just need some emerging market input at the policy level," he says. "But they aren't yet desperate enough to ask for that help."
But while seasoned EMD hands anticipate more hard work ahead, they do, at least, feel that Greek paper is pricing it in. Are they betting on Spain, too? Not on your life. Spain's 2022 bond is still trading at 94 cents; its 2041 at 67 cents. And the new Greek paper is governed by English law, while Spain can still legislate to change the terms of its debt. Only the brave are actively long Greece. But only the helpless - or the Draghi-traders - take risk elsewhere in the periphery.