Greece received the first of its three bailouts from the Eurozone countries and the International Monetary Fund in May 2010. The three bailouts provided Greece a combined total of about $330 billion in the largest bailout in history. It has taken Greece about eight years to finally exit the third and last bailout program.
The country suffered one of the deepest and longest recessions in world economic history and has endured high unemployment – currently at 19.5% – and significant loss of human capital. It will take many more years to fully heal the wounds of this unprecedented crisis. Nevertheless, today marks an important day in Greece’s history and, looking forward, we see a return to normalcy taking place.
Why We See Value in Greek Bonds
The turning point in the Greek crisis came in the summer of 2015. After heated discussions and brinksmanship, the Greek government decided to concede to the austerity demands of its Eurozone creditors. That was a major U-turn for the Greek government, which in elections campaigned for challenging the existing program. After the U-turn, Greek Prime Minister Alexis Tsipras called for early elections to get a renewed mandate from the public, which he did. After that, despite some unavoidable ups and downs and delays, the Greek bailout program has been a success.
As we discussed last year, following that turning point, we have maintained a long position on Greek bonds, which through August 2018 have performed very well. In fact, Greek bonds should be shortlisted among the best fixed income trades of the last few years: The total returns on various Greek bonds were in the range of 15%-20% per annum for the last three years,1 a good return for a sovereign fixed income product.
While such returns cannot be replicated, we believe Greek bonds still offer value at their current levels. There are a number of reasons why we think Greek debt offers value:
- First, Greece’s budget is under control and expected to remain so. The government significantly outperformed budget targets last year and is maintaining fiscal discipline this year. The results of the first half of 2018 are in line with program targets.
- Second, most Greek debt is “special,” which means that while the headline gross debt number is very high, close to 75% of that debt is not market debt; it is official loans between governments and international financial institutions. That portion of the debt has very long maturities as well as very low interest payments.
- Third, Greece has a large cash buffer, covering at least two years of its funding needs. This was accumulated after the end of the program, and achieved through primary budget surpluses and as part of the last installment of the bailout funds.
- Finally, Greece’s economy is back to growth mode after its deep recession. Jobs are being created and confidence is returning. Structural reforms put in-place over the past few years should also help long-term growth.
Primary Risks Are External
In our view, the risks to Greece are mainly external at this stage. Economic growth is on track, reversal of economic reforms and fiscal austerity is unlikely, and domestic political risks are limited.
On the political front, changing course would be counter-productive for the current government; it has more to gain from ongoing recovery and stability. Greece’s next elections will take place by October 2019, and the main opposition party currently leading in the polls is arguably more market friendly than Prime Minister Tsipras’s ruling Syriza party. Finally, the debt relief provided by Greece’s creditors is sizable, and parts of the relief will be effective in the coming years, conditional on Greece not reversing the major achievements of the adjustment program.
Overall, we think the outlook for Greece remains positive. As we have seen in other countries that suffered from crises, once the worst is over, a virtuous cycle of recovery starts. This involves improving confidence, falling unemployment, and increased investment spending and growth. While challenges remain in the medium term, we believe Greece has finally entered a period of economic growth and stability.
- ^Source: Bloomberg, 8/20/19.
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