Paul Kazarian, the U.S. investor buying up Greek government bonds, calls the European Union’s accounting “completely irrational” and wants to help finance an alternative to allow Greece to return to the debt markets.
The founder of Japonica Partners & Co. said in a Dec. 3 interview in Athens that applying International Public Sector Accounting Standards would give bond markets the same kind of audited financial statements that equity investors are accustomed to. Kazarian, who started a tender offer for the Greek securities in June, said the EU method of measuring member states’ public finances overstates the level of indebtedness.
“If you really want to be back in the capital markets and soon, you have to deliver, you have to show some early wins,” Kazarian, 58, said. “Show your debt number, give access to it and verify it, and then have the dialogue: ‘So which number is right?’ Is it a legal definition that has absolutely no economic rationality to it, or is the world-class standard the right debt number?”
Greece triggered the European sovereign debt crisis in 2009 when an incoming government said its predecessor had hidden the true size of a budget deficit that had spiraled to more than five times the euro area’s allowed limit. The country received an international bailout, and its debt ratio is projected to be 176 percent of gross domestic product this year even after completing the world’s biggest sovereign debt restructuring.
For Kazarian, who won’t say exactly how many of the restructured Greek bonds Japonica holds after its tender for as much as 4 billion euros ($5.5 billion) of the securities expired in September, applying accounting practices used in the corporate world would give a fair value for Greece’s 2013 debt. He puts that ratio at less than 100 percent of GDP.
A European Commission report in March on the suitability of IPSAS for member states noted the “essential incoherence” in the EU’S current framework, where member states’ accounts mostly record cash flows, which then are converted to generate the data used by the EU’s statistics agencies to monitor budgets. This approach “is a legal hodge podge” that “no one would aspire to adopt,” according to Kazarian.
“For the world to look at a sovereign credit that is in transition with a past that’s colored on accounting, to put it generously, they need to show something different,” he said. “They need to show that they’re world class, that they have an outside audit. What company would you ever buy that doesn’t have audited financial statements? You would never do it.”
Greek 10-year bonds, which are priced at about two-thirds of their face value, yield 8.75 percent, down from a post-restructuring high of 31 percent in May 2012. The yield, which has crept up 78 basis points since Nov. 7 as Greece and its creditors have been deadlocked over conditions for keeping its bailout loans flowing, should come down to less than 5 percent next year, according to Kazarian.
If Greece and its creditors break through their impasse, euro-area governments must still find ways to bring down the country’s debt trajectory. The focus on accounting standards is unlikely to shake the International Monetary Fund from its stance that Greece needs additional debt relief to lower its debt to 124 percent of GDP by 2020, one of the fund’s conditions for continuing to contribute to the bailout program, according to Gabriel Sterne, an economist at Exotix Ltd. in London.
“Kazarian’s taken a view on Greece, and he’s putting his money where his mouth is and his mouth where his money is,” Sterne said. “The big problem for Greece is that not enough of this portfolio flows and hedge-fund interest is going into physical capital. What Greece needs is not so much hedge funds, although it doesn’t do any harm, but what they really need is venture capitalists.”
Kazarian started Providence, Rhode Island-based Japonica after leaving Goldman Sachs Group Inc. Japonica gained prominence in the U.S. during the late 1980s and early 1990s for deals including an attempted buyout of food company Borden Inc., a failed $1.6 billion takeover of railroad operator CNW Corp. and the purchase of appliance maker Sunbeam-Oster Co.
Kazarian said his intention when he first came to Greece in April 2012 was to invest in companies, not government bonds. Now that Japonica has acquired as many bonds as it wants, the firm would consider reinvesting profits from these into Greek companies, he said.
Japonica has taken out full-page advertisements in newspapers including the Financial Times, New York Times and Greece’s Kathimerini describing Greece as an A+ credit given its fiscal consolidation since the start of the crisis and calling on the country to become the first in the euro area to adopt IPSAS accounting. He has offered to fund the start up costs to get Greece to report financial statements under the IPSAS definition next year.
Kazarian sees Greece reaching a debt estimate by the middle of next year, with audited financial statements signed by two firms achievable by the end of June 2016.
“If we see something that should change, we do our best to change it,” he said. “We discuss it rigorously internally, we come to conclusions and we make our decisions. This is not a shallow analysis. We’re very careful.”