Stalled Greece Talks Evoke 2009 Memories as Greylock Sees Carry

  • Delay in rescue package seen raising sovereign default risk
  • Bond yields surge as Commerzbank sees volatility as a given

Greece’s stalled rescue package presents at once a challenge for the nation and a possible opportunity for investors.

The government needs to show urgency to revive the talks that ended in disagreement on Thursday or face an increased risk of a sovereign default, according to private bank Berenberg. The selloff in bonds following news of the breakdown in talks may present entry points for savvy investors, according to Commerzbank AG, while Greylock Capital Management says the securities offer adequate risk-adjusted carry.

Athens is now negotiating the release of the next tranche of financial aid with creditors who are asking Greece to reform its economy, bringing back memories of 2015 when failed negotiations led to a referendum. The Mediterranean nation is still facing the consequences of a 2009 sovereign debt crisis, with its gross domestic product about 25 percent below what it was then. The nation, which had been on the verge of leaving the euro, has required three bailouts since 2010 and the European Central Bank’s support to avoid a collapse of its financial system.

“Greece needs to close the second review as soon as possible as any delay would increase the risk of a sovereign default and lead to a negative impact on economic confidence and GDP growth,” Carsten Hesse, a London-based economist at Berenberg, said in e-mailed comments, referring to the current round of negotiations.

The yield on Greece’s two-year bonds surged 58 basis points to 7.47 percent, while those on benchmark 10-year bonds rose 22 basis points to 7.13 percent as of 2:41 p.m in London. Still, Friday’s selloff was relatively tame for the nation’s notes, which are prone to outsized moves in relation to other markets owing to their lower liquidity. The 10-year yield was above 44 percent in 2012, and peaked at nearly 20 percent during 2015.

‘Enjoy the Carry’

That means investors such as Greylock Capital Management have to get used to riding out periods of volatility. The firm, which has been investing in the nation’s debt securities since at least 2015, remains bullish on the bonds as “yields in Greece are way higher than they should be,” according to Diego Ferro, its co-chief investment officer.

Greylock oversaw about $1 billion in assets as of November and invests in undervalued, distressed and high-yield assets.

"The Eurogroup news is not good but it is expected. Nothing fundamentally changes, and Greece remains near-term solvent,” Ferro wrote. “I guess at some time they may show some real leadership and fix the problem by providing proper debt relief. In the meantime, we enjoy the generous carry.”

Greek securities can offer value, although volatility is a given, according to David Schnautz, a London-based interest-rate strategist at Commerzbank.

“At this stage, we are rather cautious as things are likely to get worse for Greece -- and thus for GGBs –- before they are likely to improve,” said David Schnautz, a London-based interest-rate strategist at Commerzbank. The nation’s two- and 25-year bonds present “attractive entry opportunities,” he said.

— With assistance by Vassilis Karamanis, Marcus Bensasson, and David Goodman

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