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Greece, threat or opportunity?

Denne artikkelen er fra samarbeidspartneren vår.

In June of 2015, renewed fears of default have sparked deposit withdrawals from Greek banks as well as hoarding and capital flight. Greek banks’ equity prices have been hammered, despite strong financial ratios. Alpha Bank, for instance, has risen loan loss provisions to a prudent level while increasing its cash coverage of NPLs to 63%. Its Basel III Common Equity Tier 1 ratio stands at almost 13%, a level that many larger European banks still strive to reach. Still, its share price reaches 10% of its pre-crisis level. We see this as an opportunity.

Author: Dr Michel Henry Bouchet Strategic Advisor/North Sea Global Equity Management

With good grace for Greece? 

Nordsjø-Kombinasjon is a combination fund with a mandate to invest globally, we are currently overweight in Europe which means that we are following the Greek situation closely. Although heavily underweight, we have invested in the Greek bank Alpha Bank AE. For å complete presentation of our portfolio se www.northseagem.com.

Much has already been written about Greece’s risk of default and of exit from the Eurozone. The vast majority of analysts stress the liquidity crunch that is exacerbating the solvency difficulties of the country. The debt clock is ticking given that large debt repayments falling due during the summer cannot be paid based on Greece’s meager financial resources. A combination of refinancing, rescheduling and debt restructuring is required. The three-fold question is: why, when and at what conditions?

On the one side, Greece’s government states it has gone more than halfway to meet the demands of its official creditors to get the well-needed bailout aid, with a number of strict adjustment policies. It can’t go beyond at the risk of mounting social unrest. Prime Minister Tsipras stresses the heavy price paid by the poorest segments of the population, with large negative impact on employment, social programs, and domestic consumption. In a typical vicious circle, shrinking private spending hurts public sector resources, hence preventing any sustainable economic recovery, not mentioning restored creditworthiness. Today’s per capita GDP is back to its 2005 level, according to the World Bank. Mandatory austerity kills not only sustainable development prospects but also democracy. On the other, the so- called Troika, renamed the Brussels group to reduce the shadow of the IMF, keeps insisting on more cuts in public sector pensions and on sales tax hikes. At stake is the disbursement of €7,2 billion in rescue aid that is barely enough to keep Greece’s budget afloat.

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In many ways, looking at other countries’ experiences is no help for analyzing the Greek drama. First, Greece cannot devalue. All the austerity efforts must be made in the real economic field, that is, by cutting public spending and by boosting taxes to increase the so-called primary budget surplus. This in turn tends to depress economic activity, hence worsening the debt/GDP ratio, currently at 175%. Second, Greece has a democratically elected government led by the left-wing Syriza party that cannot impose the harsh measures the Greek military Junta could have promulgated during the 1967-74 dictatorship. Third, the Syriza coalition committed itself six months ago to end austerity measures in order to restart the economy and to promoting social justice. Greece is not Puerto Rico whose constitution stipulates that government debt must be serviced before other liabilities, such as pay and pensions. Overall, how can the two parties reach the “Peace of the Braves” at the last minute?

Fixing the Greek crisis requires reaching a consensus within each side of the negotiating table. The Greek government itself is deeply split. The coalition comprises a wide range of radical left groups that have been joined by social democrat, anti-capitalist and environmentalist components. The only common thread is a Keynesian economic stance, arguing that public spending should kick start growth. On the creditor side, there is no consensus either within the Troika. The IMF takes a hard line, insisting on structural reforms as well as on ambitious budget surplus targets and timely debt repayments. The EU Commission and the ECB want to set a precedent that could be useful in future crises in peripheral Europe

(Spain, Italy and Portugal, but also France). However, the ECB must balance its “rule-based” policy process with preventing a euro-zone dislocation that would trigger a costly global market crisis. The ECB thus maintains a €80 billion liquidity lifeline to Greek banks (the so-called Emergency Liquidity Assistance …). This financial “short leash” is essential to meet banks’ liquidity needs and to offset deposit outflows.

Fixing the crisis also requires taking into account the “red line” each side has drawn. No need to insist on cutting to the bone civil servants salaries or pensions. Only German Minister Wolfgang Schäuble is blind enough to take such a harsh stance. No need to keep asking the official creditors to accept a haircut, similar to that of the private creditors back in 2012. Only shortsighted professor-turned-Minister Varoufakis can advocate such a burden sharing that has been implemented in such extreme cases as Argentina or Ivory Coast. The common sense solution lies in a combination of time, money and debt reprofiling that must be fine-tuned to meet the constraints of each group of creditors, both bilateral and multilateral. The Paris Club can use a standard debt conversion clause that will provide each European country with enough room to maneuver to swap debt for environmental, social and infrastructure programs.

The World Bank and the EIB can play a role to identify priority investments that would stimulate job creation while promoting sustainable development. The IMF can provide more time, with an extended monitoring of its structural adjustment program. The ECB can increase its funding support for Greek banks in order to stimulate bank lending to the private sector. Greece’s banking system will be a key engine for any lasting economic recovery. In June of 2015, renewed fears of default have sparked deposit withdrawals from Greek banks as well as hoarding and capital flight. Greek banks’ equity prices have been hammered, despite strong financial ratios. Alpha Bank, for instance, has risen loan loss provisions to a prudent level while increasing its cash coverage of NPLs to 63%. Its Basel III Common Equity Tier 1 ratio stands at almost 13%, a level that many larger European banks still strive to reach. Still, its share price reaches 10% of its pre-crisis level.

Overall, Greece is not Burkina Faso. It does not deserve nor need sharp official debt reduction. However, the country requires liquidity relief that both bilateral and multilateral creditors must provide. That should be enough to restore confidence in the country’s development prospects, with resumed private and foreign investment that will boost job creation and tax revenues, in a typical virtuous circle.

(Bouchet is the author of many books on global finance and risk management published by Wiley, Oxford Economics, Pearson, Greenwood, ESAN…, and articles including in WORLD FINANCIAL REVIEW, http://www.dn.no/forsiden/borsMarked/article2618196.ece….

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