Betting on A Greek RecoveryBy , , and
Greece heading in right direction, political risk diminished
Country is very close to getting full bond market access
Prem Watsa is bullish on both Eurobank Ergasias SA and Greece’s economy.
After suffering losses of more than $600 million in the country since 2014, the 67-year-old chairman and chief executive officer of Fairfax Financial Holdings Ltd. says he’s even willing to consider expanding his exposure to Greece. He’s particularly confident about a turn in the fortunes of Eurobank, in which Fairfax has an 18 percent stake, making it the lender’s biggest shareholder.
“Eurobank is very well capitalized; non-performing loans are coming down nicely, the bank is profitable so I believe the upcoming stress tests should go well,” Watsa, often referred to as Canada’s Warren Buffett, said in a telephone interview from Toronto.
Greek banks are struggling to shrink their huge exposure to bad loans, which at the end of September stood at 99.1 billion euros ($117 billion). Failure to do so may force them to seek another capital increase. In that context, upcoming stress tests are crucial, with European regulators pushing Greek lenders to do more to cut their non-performing exposures.
Eurobank posted net income of 61 million euros in the third quarter and is predicting that it will beat its revised NPE targets for 2017. The lender also completed in November the first electronic auction of a foreclosed property in Greece, a tool which is supposed to help the country’s banks address the bulk of their bad loans.
Eurobank is “in a very sound financial position,” Watsa said. The lender’s shares have risen 23 percent since the e-auction, recouping a part of the losses since July when the International Monetary Fund said that Greek banks will need extra capital.
“For this size of bank, it’s a very low price. It has a market capitalization of 1.6 billion euros and more than 60 billion euros in assets,” the Canadian investor said.
Watsa’s comments come as investors gradually regain trust in Greece’s prospects, after years in the wilderness of successive crises in its relations with creditors. Brevan Howard Asset Management is readying two funds focused on Greece, betting on a recovery in an economy shattered by almost a decade of crisis. The hedge fund’s products, investing in property and publicly traded stocks, will be managed by Brevan Howard founding partner Trifon Natsis, the company said earlier this month.
“The country is going in the right direction,” Watsa said. “The risk of Greece leaving the euro is almost zero.”
The Greek government reached an agreement with the country’s creditors for the third bailout review, sealed at the last Eurogroup meeting in Brussels. It also completed an unprecedented debt swap in late November.
“The prime minister and finance minister have done all that was requested by creditors,” Watsa said. Political risk was “the case in 2013 and 2014 and now this risk is diminished and perhaps gone away.”
Yields on Greek bonds have dropped to 2009 levels, where they were before the first bailout program. Watsa estimates that the Greek government is likely to tap the bond market in early 2018. Asked if he’d be a buyer of new Greek bonds, he said, “You never reveal your investment plan, but when the time comes we will see, and the same goes for Greek stocks.” Fairfax already has substantial Greek government-bond holdings.
Greece’s return to normalcy will need a few more steps. Among them, the lifting of the capital controls imposed in 2015.
“The capital controls will be removed,” Watsa said. “When the capital controls were lifted in Cyprus, the deposits came back in, didn’t go out and it will be the same in Greece.”
With Greece well on its way to becoming a turnaround story, Watsa is not ruling out more investments.
“We’ve lost a lot of money in Greece. But we are long-term investors. Our investments in Greece, including Eurobank, Grivalia, Mytilineos and Praktiker have a cost of $1.3 billion. The fair value as of December 2016 was $648 million.”
Still, “for investors it’s worth taking a long hard look at Greece,” he said.
— With assistance by Paul Tugwell