Fatigued Investors Want Draghi to Buy Greece Before They DoBy
Government promises quick conclusion of pending bailout review
Investors are skeptical on reforms as companies make pitches
Michel Danechi isn’t buying the Greek turnaround story just yet.
As Greek business leaders and government officials presented to investors last week in London a list of reasons why valuations of the country’s assets make them attractive, Danechi’s Duet Asset Management took note. But what he wants to see is for Greece to show it can make good on pledges made to euro-area creditors so it can be included in the European Central Bank President Mario Draghi’s quantitative easing program.
“Valuation is there, but few believe that this government can deliver,” said Danechi, who helps oversee $1.5 billion in emerging-market assets at Duet. “If Greece goes into the QE program then the mood would turn automatically.”
Investors are in no rush to pour money into a market where the value of stock and bond holdings has been repeatedly crushed. In dozens of meetings at the annual Athens Stock Exchange roadshow, Greek executives were bombarded with well-worn questions about political risk, delayed reforms, lack of liquidity, excessive corporate taxes and an unfavorable business climate.
“Our message was ‘invest in Greece,’’and their response was ‘if you do what’s necessary, we will,”’ said Thanassis Drogossis, head of equities at Athens-based Pantelakis Securities, one of the Greek brokers that sponsored the event.
Greek stocks have dropped about 11 percent this year, after losing about a quarter of their value in 2015. Yields on Greek 10-year sovereign notes have remained over 8 percent, by far the highest in the euro area, even after the government managed to strike a deal with creditors on the conclusion of its latest bailout review in June.
The flow of good news gathered pace this week. On Tuesday, Greek lawmakers approved yet another round of measures required by creditors for the disbursement of emergency loans. Finance Ministry data showed budget execution is on target. Bank of Greece said deposits held in country’s banks rose in August. And Prime Minister Alexis Tsipras intervened to salvage a stalled deal to sell the country’s gas grid operator to Socar, signaling willingness to move ahead with privatizations.
Still, investors have been burned by false expectations before. Hopes of a Greek turnaround have been dashed as the first euro-area country to seek a bailout remains the only one still on life support from its peers. Tsipras’s government is bracing for yet another round of talks with creditors on issues ranging from labor market reform and reducing non-performing loans to medium-term budget targets. That’s as the economy struggles to recover from last year’s standoff with creditors that almost pushed the country out of the currency bloc.
“Investors are focused on the progress on NPL resolution and their message was for more growth-friendly policies, especially lower tax rates and fast implementation of structural reforms,” said Drogossis.
Fear to Fatigue
Fear has given way to fatigue, said two Greek executives present at the roadshow. Almost all of the participants were emerging market and speculative investors, the officials said, asking not to be named as the meetings weren’t public. Greek listed companies focused on their own fundamentals, as they struggled to cobble together a convincing narrative about the country’s prospects, they said.
Investors are “still cautious, in a holding pattern, but they are very interested in Greece,” said deputy economy minister Alexis Charitsis, who represented the government at the London event. “If one is looking for high returns these days in Europe, where else can they go?” he asked in an interview at the Greek ambassador’s residence, in Mayfair, London.
Take Hellenic Telecommunications Organization SA, for example. The ratio of its enterprise value to its earnings before interest, tax, depreciation and amortization stands at 3.8 compared with between 5.5 and 8 for its European rivals.
Franciscos Koutentakis, Greece’s Secretary General for Fiscal Policy, said “there’s an exaggerated perception of risk” in the bond market that’s keeping some investors at bay.
“Yields at 8.5 percent are simply not justified,” he said on Friday, after meeting institutional investors in London, adding that since last year’s bailout agreement, the government has delivered on all of its commitments for fiscal consolidation and structural reforms.
Both Charitsis and Koutentakis said investor sentiment will soon change as positive catalysts fall into place over the next three months, including the conclusion of the next bailout review, a deal easing the country’s debt repayment terms and the subsequent inclusion of Greek government bonds in the ECB’s asset purchase program.
“We have a road map, we are fully committed to our plan, and we will see a significant rebound in 2017,” Charitsis said.
This week will mark the start of the turnaround, according to Charitsis, with the government set to fulfill the remaining conditions for the disbursement of a 2.8 billion-euro sub-tranche by Sept. 29. Preparatory technical work for the next bailout review is well under way, and no further delays are expected, he added.
“Greece is becoming a high yield, low risk economy,” he said. “We ’re not there yet, but we’re getting there.”
The International Monetary Fund doesn’t share his optimism. In an assessment of the country’s economy published last week, the Washington-based creditor said Greece needs to cut pensions more, and euro-area states need to cut more of Greece’s debt. Neither the government nor its creditors are willing to accept the advice.
The IMF has been wrong before, consistently underestimating Greece’s performance, said Koutentakis. The government will comfortably meet its budget targets for this year, and euro-area states will extend the repayment periods for some of its bailout loans, while shielding them from interest rate risk. “Those who want high returns, should enter in this transitional period, otherwise they will miss the window of opportunity,” he said.
Investors like Danechi are in no hurry.
“Not yet, not until we see actual implementation and not just talk,” he said.
— With assistance by Cecile Vannucci