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GREECE IN THE GLOBAL MARKETPLACESTEERING TOWARDS ECONOMIC RECOVERY

May 2014

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2 MACROECONOMIC OVERVIEW The next big challenge: sustained recovery

6 REFORMS: A PROGRESS UPDATE Back from the brink — but pressure must be kept up

9 PRIVATISATION Hellenikon breakthrough a fresh start for sell-off plan

11 FOREIGN DIRECT INVESTMENT Opening up the economy to the outside world

13 THE ROLE OF THE TROIKA Troika medicine begins to work as Greece shows improvement

15 INTERVIEW WITH THE BANK OF GREECE Exports and investments to drive post-crisis economy

17 PDMA PROFILE Returning in style

18 PDMA ROUNDTABLE First peak scaled with bond return, now on to the summit

26 BANKING SECTOR ROUNDTABLE Positive momentum returns to recalibrated banks

34 BANKING SECTOR Banking sector emerges from realm of fear and speculation

38 CORPORATE FINANCING Greek companies get back on the road, with help from bonds

40 VIEW FROM THE BUYSIDE Bond market blow-out masks investor caution

Cover image: a ship being towed through the Corinth Canal, Greece

2 | May 2014 | Greece in the Global Marketplace

MACROECONOMIC OVERVIEW

WHEN GREECE’S Public Debt Man-agement Agency (PDMA) success-fully tapped the international bond market in April, for the first time since 2010, prime minister Antonis Samaras grasped the opportunity to broad-cast the success of the transaction on national television. And why not? “For Greece to have generated demand of €20bn having been shut out of the market for four years was an impres-sive endorsement of what the gov-ernment has achieved,” says Murat Ulgen, CEEMEA economist at HSBC in London.

Others agree. “The success of the bond was a very clear signal that the market believes in the Greek recov-ery story,” says Athanasios Vamvak-idis, Greece economist and head of European G10 FX strategy at Bank of America Merrill Lynch in London.

As the country prepared to go to the polls for May’s European elections, Greek politics were on a knife edge (see box), which is why prime minis-ter Samaras pulled out all the stops to make political capital out of the suc-cess of the deal. “One of the reasons the government wanted to go ahead with the transaction was to demon-strate to the public that it is on track to exit from the bail-out programme as soon as possible,” says Gizem Kara, eurozone economist at BNP Paribas in London.

It is no coincidence that German chancellor Angela Merkel flew into Athens the day after the bond issue to lend some very visible support to prime minister Samaras and the pro-reform coalition he leads, which has a cigarette paper-thin majority. Mer-kel’s public display of bonhomie and solidarity was important, because for all the progress that Greece has made in recent months, its economy is far from being out of trouble.

Greece’s depressionIn a country that has lost about a

quarter of its GDP since the start of the crisis, it would be a miracle if it were. Frank Gill, senior director of European sovereign ratings at Stand-ard & Poor’s (S&P) in London, points out that by the end of 2013, domestic demand in Greece had declined 30% from its peak. “To put that into its historical context, it is a worse slump than the US saw during the depression of the 1930s,” he says.

The legacy of Greece’s recession is grim. Unemployment reached 26.7% in January. That is modest in compar-ison to joblessness among the under-25s, which was put at 59% in Novem-ber 2013 by Eurostat, comfortably the highest rate in Europe. Against that backdrop it is little surprise that net emigration from Greece has reached its highest level since records began, according to the latest figures com-piled by Eurostat.

Perhaps more shocking than these corrosive jobless numbers is the con-tinued spread of poverty in Greece. According to the OECD’s latest Society at a Glance analysis, 17.9% of Greeks say they are unable to buy food — which is more than in countries with much lower per capita income, such

as Brazil and China. According to the OECD’s data, the income of the aver-age Greek shrank by €4,400 between 2007 and 2012, the highest among OECD countries and four times the eurozone average.

No wonder that deflation, which returned to Greece last year for the first time since 1968, shows little sign of being reversed. No wonder, either, that small businesses are feeling the pinch. One recent survey from the Hellenic Confederation of Professions, Craftsmen and Merchants (GSEV-EE) warns that almost one in two SMEs are at risk of closure in the next six months. This would add 27,000-30,000 defunct businesses to the 200,000 that are already casualties of the Greek economic catastrophe.

More surprising, in light of some of the more lurid stories that have appeared in the media about the con-sequences of economic misery in the country, has been the resilience and stoicism that has been shown by the majority of Greeks. According to the OECD’s data, Greece’s suicide rate of 3.1 per 100,000 people is up only mar-ginally on pre-crisis levels.

Greece’s crime rate, meanwhile,

Recovery has taken hold in Greece — a remarkable achievement for a country that has lived through a worse slump than the US experienced during the Great Depression of the 1930s. Now the big question for investors is whether Greece can deliver sustained growth to pay down external debt and create employment, thereby reducing the appeal of political extremists and reversing the country’s destabilising brain drain. Philip Moore reports.

Greece’s next big challenge: sustained recovery

German chancellor Angela Merkel lent her support to Greece’s prime minister Antonis Samaras, flying in a day after the country’s return to the bond markets



has confounded those who predicted that lawlessness would rise in lockstep with unemployment and poverty. Pre-dictably enough, incidences of beg-gary, smuggling and currency forging all rose last year, but it is a credit to the Greek people that serious crime was down. Numbers released by the Greek police indicate that the homicides, robberies and burglaries fell by 11.9%, 17.9% and 15.2% respectively in 2013.

“Given the unemployment rate, especially among young people, you might expect the crime rate to have risen, but this hasn’t been the case at all,” says Nicholas Exarchos, manag-ing director and head of Greece and Cyprus at Deutsche Bank in London.

Turning pointAthens-based economists say that while there has been a series of nation-al strikes since the end of 2009, indus-trial action in Greece has also been less disruptive than some sections of the international media had expected. Pro-fessor Gikas Hardouvelis, chief econo-mist at Eurobank EFG in Athens, says that this reflects the growing political maturity of the Greek electorate since the start of the crisis.

For the first time, says Hardouvelis, there has been recognition at a grass roots level that the state’s resourc-es are not a bottomless pit. “Prior to the crisis, there was a leftist assump-tion that the state was invincible and that it was reasonable to make new demands on the government on a continuous basis,” he says. “People never stopped to dig into how these demands would be financed.

“One reason why strikes have been neither as long, nor as popular, as some

people expected is the recognition that the state has nothing more to give.”

Recent economic data suggests that Greece is beginning to reap the rewards of its maturity and rela-tive resilience to economic adversi-ty. “2013 marks a turning point, with the elimination of the twin deficits and the restoration of the economy’s cost competitiveness,” said George Provopoulos, governor of the Bank of Greece, at the central bank’s annual shareholders’ meeting in February.

Specifically, Provopoulos point-ed to Greece’s first primary surplus since 2002 as evidence of the recov-ery, which he described as “a remark-able achievement, considering the severity of the recession”. Remarkable indeed. The surplus reached €2.4bn in 2013, and the early indications suggest that in 2014 Greece will continue to deliver better than expected fiscal per-formance. At the end of April, Euro-stat verified that the primary surplus in the first quarter of 2014 reached €1.57bn, compared with €520m in 2013 and well ahead of the govern-ment’s projection of €878m. Some of the surplus is being used to pay down public debt, but the strong perfor-mance on the fiscal side also allowed Greece to distribute more than €500m to the needy — just in time for May’s European elections.

Some economists say that the pri-mary surplus numbers need to be interpreted with caution. “Last year’s surplus will be hard to sustain,” says Miranda Xafa, an independent econo-mist who was previously at Citigroup and the IMF before setting up EF Con-sultancy, an Athens-based advisory firm focusing on eurozone economic

and financial issues. “It contained a lot of one-offs, such as three years of property tax receipts in a single year which obviously won’t be repeated. There was also a large dividend paid by the central bank to the government for the fees collected from the banks for the financing they received under the exceptional liquidity assistance facility when they had no access to the ECB discount window.”

Nevertheless, the significance of the primary surplus, say others, should not be underestimated. “Some people have argued that the surplus has been driven by some one-off items and that more effort will be needed to generate a similar surplus this year,” says Vam-vakidis at BAML. “But the important point is that the authorities have dem-onstrated that they are able to meet their fiscal targets.”

Sustainable growthIn his chest-thumping year end review, Provopoulos also highlight-ed the performance of the current account as an important indication of the turnaround in Greece’s fortunes. A deficit that reached 15% of GDP in 2008 turned slightly positive last year, bolstered by a 1.8% rise in exports of goods and services in 2013. With inter-national tourist arrivals exceeding the government’s initial target for the year of 17m, net receipts from the tour-ism industry rose by more than 18% in 2013.

Greece’s economic achievements have not gone unnoticed by the rat-ings agencies, with Fitch upgrading the sovereign rating to B with a stable outlook in late May.

Looking to the longer term, how-

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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Greece real GDP, forecast Greece unemployment rate

Source: OECD Source: OECD



ever, the central question for inves-tors is whether Greece can deliver the sustained growth it needs to pay down external debt and create employ-ment opportunities, thereby reducing the appeal of political extremists and reversing the country’s destabilising brain drain.

Increasingly, economists are becoming more sanguine on this score. “I’m more optimistic than I was six months ago,” says Hardouve-lis. “The big question now is wheth-er we’re going to see growth com-ing close to the 2.9% level that forms the basis of the troika’s model. With investment and privatisation pick-ing up, the probability of this growth materialising is rising by the day.”

Economists say that the 2.9% target may prove too ambitious. So too may the troika’s expectation of 0.6% this year. Daniele Antonnuci, economist at Morgan Stanley in London, is fore-casting near zero growth this year, for example.

At HSBC, Ulgen is expecting GDP growth in 2014 of 0.2%, rising to 2.2% in 2015, although he sees two main threats to this forecast. The first has emerged following the crisis in Ukraine. “The tourism sector was boosted by arrivals from Russia which supported a strong rise in revenues,” says Ulgen. “We expect the recent cri-sis in Ukraine to lead to weaker Rus-sian growth, which may have a sizea-ble knock-on effect on Greek tourism.”

Another key challenge, says Ulgen, will be to implement the long list of structural reforms that are needed if Greece is to become more competitive in the export market.

With domestic demand weakened by the pervasive austerity programme, Greek companies are recognising that in some cases their survival may depend on their capacity to reverse the country’s feeble track record in the export market.

The good news is that exports have continually expanded relative to GDP over the last five years, rising from 8.7% in 2009 to 10.5% in 2010, 12.6% in 2011, 14.3% in 2012 and 15.9% in 2013. The bad news is twofold. First, with GDP having contracted so sharp-ly over this period, exports have only been able to secure a larger share of a shrinking cake. Second, the contribu-tion of exports to GDP continues to lag well behind Portugal, where exports rose from 28% of GDP in 2009 to an

estimated 40% in 2013.Nevertheless, economists are hope-

ful about the prospects for growth and diversification of Greek exports.

Accelerated growth will support Greece’s efforts in chipping away at its formidable debt mountain. The gov-ernment has set itself an ambitious target of reducing this from a little more than 170% of GDP today to 124% by 2020. That will take some doing, as it is contingent on Greece lifting its primary surplus to 4.5% of GDP by 2016. But bankers say that even at today’s vertiginous levels, they remain

relatively relaxed about Greece’s debt, chiefly because of the terms of its restructuring.

Economists warn that these debt sustainability metrics would be weak-ened by an extended phase of defla-tion, which Morgan Stanley’s Anto-nucci identifies as a longer term risk for the Greek economy. “There is still a lot of spare capacity in the economy, and by our calculations the price of about three quarters of Greek goods and services is falling, which of course makes the debt burden less sustaina-ble over the long term,” he says. s

In no other EU country has the political map been redrawn as comprehensively, nor as ir-reversibly, as in Greece.

The coalition government led by Antonis Samaras’s New Democracy has been in pow-er since June 2012, when it won a majority of 26 in Greece’s 300 seat parliament. Follow-ing a series of internal squabbles and defec-tions, this uncomfortably slim majority had been reduced to three by the end of 2013, leaving Greek politics on a knife edge.

The centre-left Pasok party, a fixture of the Greek political landscape since its cre-ation in 1974, has been widely blamed for Greece’s economic crisis and for the auster-ity that has followed. The result has been that its share of the popular vote sank to a low of 4%, according to one recent poll.

Into the political void created by Pasok’s implosion has stepped a number of new or reinvented political parties, the most sinis-ter of which is the ultra-right Golden Dawn group, which strong-armed its way into the Greek political landscape after the 2012 elections. Since then, it has enjoyed a dis-quieting degree of success, with its odious blueprint for neo-Nazism winning it more than 9% of the vote in this month’s Euro-pean elections.

Golden Dawn’s website calls for the “im-mediate deletion” of Greece’s debt, which it describes as illegal and onerous. It demands “immediate nationalisation” of Greece’s en-ergy resources, “purification” of the banking system, and compulsory military service. It also argues that entry into the euro marked “the utter destruction of… Greek agricul-tural production, craftsmanship…. and erst-while mighty Greek industry.” Most unset-tling, Golden Dawn urges “immediate arrest and deportation of all illegal immigrants”.

Rational Greeks say that sabre-rattling of this kind needs to be taken with a pinch of

salt. “I personally wouldn’t worry too much about Golden Dawn,” says George Zois, head of Greek equities and capital markets at the London-based emerging and frontier markets boutique, Exotix. “The idea that half a million Greeks are neo-Nazis is rub-bish. Support for Golden Dawn reflects a protest vote.”

Perhaps. But a bigger concern for inves-tors in Greek assets may be the continued popularity of the Radical Coalition of the Left, more digestibly known as Syriza, which won 26.6% of the vote in the European election — a shot across the bows for New Democracy, which came second with 22.7%. Described by one political commentator as “a radical left wing anti-austerity government in waiting”, Syriza shares none of Golden Dawn’s loath-some political ideology. But as it owes much of its popularity to its rejection of Greece’s Memorandum with the EU and IMF which forms the basis of the country’s bail-out, it has advanced some of the economic propos-als espoused by the far right.

Syriza’s president, Alexis Tsipras, has called for a Marshall Plan-style programme for re-energising the Greek economy, a rene-gotiation of Greece’s debt and the nationali-sation of the banks. Although his party has publically asserted that it is “not [its] choice to exit the euro”, it has qualified this by say-ing that “neither can we consent to the con-tinuation of policies that offer no guarantee for the survival of our society and our coun-try”. That, say some observers, makes Syri-za sound suspiciously like a party that wants to have its cake and eat it — which Germany, for one, is unlikely to countenance.

Nevertheless, investors fear that strengthening support for Syriza could lead to a U-turn in economic policy, which would in turn risk derailing Greece’s relationship with its creditors. s

The threat of Syriza


REFORMS: A PROGRESS UPDATE

EVANGELISTS of Greece’s long term recovery say that an economic meta-morphosis is starting to take shape in the country. “The issue here is the transformation of the economy away from non-tradables and towards exports,” says Michael Massoura-kis, group chief economist at Alpha Bank in Athens. “Historically, Greece focused too much on the creation of a large non-tradables sector, as a result of which exports as a percentage of GDP are about half of what they are in Portugal.”

In an update published at the end of 2013, Alpha Bank cheerfully forecast that “robust growth” in Greek GDP in 2015 will be supported by what it calls “the spectacular improvement in the international competitiveness of the country”. This competitiveness, pre-dicted the Alpha report, would apply to exporters as well as to companies focused on import substitution.

Economists say that this is a trans-formation that can’t come too quickly, given the degree to which domestic demand has been dampened by the austerity programme. But few seem to share Alpha Bank’s level of enthusi-asm for Greece’s short term prospects.

“One of the main problems with Greece is that its exports to GDP ratio is one of the lowest in the eurozone,” says Gizem Kara, eurozone econo-mist at BNP Paribas in London. “The improvement in the current account balance has been driven more by a massive fall in imports than by a rise in exports. This is in spite of the fall in nominal unit labour costs which are now back to the levels of the early 2000s, which suggests that Greece needs to focus on improving competi-tiveness on the product side.”

Mind the competitiveness gapGreece has already made noticeable progress in recapturing its competi-tiveness through collective auster-ity, strikingly reflected in the sharp decline in its unit labour costs (ULCs) relative to other crisis hit countries. From their peak in 2008 to the third

quarter of 2013, Greek ULCs nose dived by 18%. This compares with declines over the same period of 17% in Ireland, 9% in Cyprus, 8% in Spain and just 5% in Portugal.

Athens-based independent eco-nomic consultant Miranda Xafa says that the fall in ULCs is signifi-cant, but needs to be put in its his-torical context. “After Greece joined the euro in 2001, the assumption that per capita income levels would converge with the euro area aver-age led to annual wages growth of 5%-6% when the corresponding wage increases in Germany were less than 2%,” she says. “So a huge gap in com-petitiveness opened up. The recent adjustment in ULCs has closed this gap, but regulatory impediments, labour market rigidities and red tape prevent resources from moving to the tradables sector.”

“What Greece has achieved after six years of depression should not be downplayed,” adds Murat Ulgen, CEEMEA economist at HSBC in Lon-don. “It has done a great job in terms of internal devaluation which has played an important role in helping to address its massive imbalances on the fiscal and current account deficit side.”

Others agree that Greece should be given credit for the progress that has already been made. “Plenty is writ-ten about what hasn’t gone well for Greece, but it is important to recog-nise what has gone well,” says Dan-iele Antonucci, economist at Morgan Stanley in London. “As well as bring-ing ULCs back to below where they were when Greece entered the euro-zone, progress has been made on the fiscal side and on pension reform.”

This does not mean that Greece can afford to lower its guard on reforms. Christoph Weil, economist at Com-merzbank in Frankfurt, says that he is expecting growth of 1% this year and 2% in 2014. “The worst is over, but this return to growth will not be enough to reduce unemployment significantly,” he says. “Reform implementation is

critical if Greece is to generate sustain-able long term growth.

“The two most pressing problems Greece needs to address are the inef-ficiency and size of its official sector,” he says. “Although there are plans to reduce the size of the civil service I doubt that this will be fully imple-mented.”

Slowly picking apart oligopolies Others say that labour reform needs to remain front and centre of the Greek reform effort. “Greece will need to continue to suppress its unit labour costs,” says HSBC’s Ulgen. “This is why it is so important that it pushes ahead with structural reforms in areas such as closed and protected profes-sions to address inherent distortions that continue to hold back competi-tion.”

In Greece, that is easier said than done. Witness the recent hullaballoo that erupted when the Greek parlia-ment approved an omnibus bill aimed at implementing a series of structural reforms recommended by the OECD. One of those recommendations was that the five day restriction on the shelf life of pasteurised milk be lifted in order to encourage more competi-tion in the dairy industry. Protection-ism in the sector is the main reason why Greeks pay a third more for their milk than the average European.

The approval of the reform bill did not just prompt outraged dairy farm-ers and milk producers to take to the streets of Athens. It also led to the immediate resignation of deputy farm

Greece has fought hard to recapture competitiveness through deep and unpopular austerity measures. But the country can’t afford to stop now — further structural reform is critical if the country is to deliver full economic recovery, writes Philip Moore.

Greece is back from the brink — but pressure must be kept up

“What Greece has achieved after six

years of depression should not be downplayed”

Murat Ulgen, HSBC


REFORMS: A PROGRESS UPDATE

minister Maximos Harakopoulos. Several thousand other, equal-

ly unhappy, trade union members, including chemists upset by the gov-ernment’s plans to deregulate phar-macy licences, joined disgruntled dairy workers in demonstration in March. “Greeks have never experi-enced pharmacies being open on Sat-urdays or Sundays,” says professor Gikas Hardouvelis, chief economist at Eurobank in Athens. “Nor have they ever been able to buy an aspi-rin in a supermarket. This is why we were paying four times as much for our pharmaceuticals as the Spanish. Slowly, we are picking apart oligopo-lies such as those that were created by pharmaceuticals companies, doctors and hospital managers.”

The approval of the reform bill in March is not the first time that the Greek government has incurred the displeasure of trades unions by lay-ing siege to anachronistic practices that would be regarded as laughable in most other countries. In 2010, for example, it belatedly revised the list of so called arduous and unhealthy occupations (AUOs), originally drawn up in 1951, that entitled workers to retire early on a full pension.

There was nothing uniquely Greek about AUOs, which are recognised by governments throughout the world. What was bizarre about Greece’s list of over 500 occupations was the sheer scope of jobs deemed hazardous to human health. These included trom-bonists, whose profession apparent-ly exposed them to the risk of gastric reflux, hairdressers handling danger-ous chemicals, and pastry chefs breathing in burnt flour.

All this could have been dismissed as a comical eccentricity had the impact on Greece’s public finances not been so dire. In its 2009 report on Greece, the IMF cal-culated that had the status quo on government spend-ing on areas such as pensions been maintained indefinitely, public debt would have been on course to reach 800% of GDP by 2060. In a wonderful understatement, the IMF con-cluded, “these are not sound prospects”.

Happily, Greece has come a long way since the publica-tion of the IMF’s 2009 report.

In a statement published in March, the troika reported that “the authori-ties are making progress on structural reforms to improve the growth poten-tial and flexibility of the Greek econo-my.” These reforms, added the troika, would “help create a fairer and more supportive environment for invest-ment, growth, and job creation.”

Stripping away the restrictionsToday, Greece’s planned disman-tling of protectionism in sectors like milk production and pharmacies was a response to the publication earlier this year of the OECD’s Competition Assessment Toolkit. This identified 555 regulatory restrictions that the OECD says are “potentially harmful to competition” in four key sectors of the Greek economy — food processing, retail trade, building materials and tourism. Between them, these sectors account for 21% of GDP and 27% of employment.

The OECD’s report makes 329 spe-cific recommendations to mitigate harm to competition in Greece, the implementation of which would have far reaching implications for the econ-omy. “If the particular restrictions that were identified during the project are lifted, the OECD has calculated a posi-tive effect to the Greek economy of around €5.2bn,” the OECD advises.

This estimate, however, refers only to 66 of the 329 recommendations with a quantifiable impact, suggesting that the full effect on the Greek econ-omy is likely to be considerably larg-er. The OECD gives some indication of the wider potential impact when

it says that selected pro-competitive reforms introduced in Australia in the 1990s boosted GDP by 2.5%.

Simply to leaf through the OECD’s 391 page report is to gain a remarkable insight not just into the magnitude of the savings that Greece could make by introducing some very straightfor-ward changes. It also shines a light on how petty and obstructive pre-vious Greek administrations have been, and how protective they were of vested interests. Lift the five mile restriction on moorings, and marinas could generate an additional €2.3m of revenue annually. Do away with an obscure ruling that prevents cruise ship passengers from disembarking at one Greek port and re-embarking at another, and there would be a direct and indirect impact on the economy of €65m a year.

These benefits pale into insignifi-cance, however, in comparison to the economic stimulus that would flow from the simple expedient of liberal-ising Sunday trading. Allowing Greek shopkeepers to open at weekends, according to the OECD, could cre-ate between 18,000 and 30,000 jobs, increase retail turnover by almost 11%, and generate additional annual sales of some €2.5bn.

None of this involves asking the Greek population to make wrench-ing sacrifices, as some of the country’s politicians have suggested. It is simple common sense.

While some economists still express their doubts as to whether Greece will have the political gump-tion to implement the recommenda-

tions in their entirety, oth-ers are more hopeful about the reform programme. “I’m cautiously optimistic about the prospects for Greece, but long term growth depends on implementation of the remaining key structural reforms,” says Athanasios Vamvakidis, Greece econo-mist and head of Europe-an G10 FX strategy at Bank of America Merrill Lynch in London. “Although there has been some opposition to reforms in the past, I think there is a growing under-standing among members of the public that sustained growth won’t be possible without structural reform.” s

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PRIVATISATION

“BONKERS” IS the word used by one banker to describe the objec-tive set by the Greek government in 2011 to generate privatisation reve-nues of €50bn by 2015. Bankers say that, in fairness to Greece, this star-ry-eyed target — which equated to almost a quarter of 2011 GDP — was thrust upon the government by the troika of international lenders — the International Monetary Fund, the European Central Bank and the European Commission.

More specifically, this target was heaped upon the shoulders of the new Hellenic Republic Asset Devel-opment Fund (HRADF). TAIPED, to give the fund its Greek acronym, was set up in July 2011 to “restrict govern-mental intervention in the privatisa-tion process”.

“The original targets were cer-tainly ambitious in terms of timing, although not necessarily in terms of their ultimate scope,” says Constan-tinos Maniatopoulos, who took over as chairman of the HRADF last Sep-tember. The targets were ambitious, say Athens-based observers, in part because of the sheer scale of the pre-paratory work involved in valuing real estate assets and preparing them for sale.

The Letter of Intent, Memoran-dum of Economic and Financial Poli-cies, and Technical Memorandum of Understanding signed between Greece and the troika in December 2012 that outlined the policies that Greece intended to implement in the context of its request for financial support, noted that over and above the gaming, utilities, infrastructure projects and bank assets earmarked for sale, with an estimated value of €26bn, the government had screened more than 80,000 real estate proper-ties worth between €20bn-€28bn.

Translating this hypothetical value into receipts is not, however, some-thing that will be achieved overnight,

given HRADF’s stretched resources and the fund’s total headcount of just 45 employees.

Besides, as the European Commis-sion comments in its most recent review, “despite the large number of [real estate] assets available, cur-rent weak demand and immaturity of assets make it difficult to attract much value from real estate in the short term, which has resulted in some adjustment in the projections.”

Unrealistic targetsDeutsche Bank reflected on how unrealistic the original targets for pri-vatisation receipts turned out to be in a report on privatisation in the euro area published in August 2013.

“The plans soon proved to be nothing more than an exercise in futility given the heavy economic slump in Greece and international investors’... widespread doubts about Greece’s continued membership of the monetary union,” Deutsche com-mented. “Over the past two years only around one-tenth of the origi-nally targeted proceeds of €5bn had been generated.”

These proceeds are more in line with what economists were predict-ing at the time of the initial discus-sions with the troika. “Back in 2010 we were forecasting that proceeds of €5bn would be realistic for the priva-tisation programme, and that land-mark still has not been reached,”

says Daniele Antonucci, economist at Morgan Stanley in London. “It is worth remembering that prior to the announcement of the OMT there were still break-up risks in Europe. Regardless of how attractive assets may have looked, very few investors were prepared to take on currency redenomination risk.”

Even if they had been, Greece refused — quite correctly — to offload assets during the global downturn at what would inevitably have amounted to fire sale prices.

Small wonder that the privatisa-tion targets have since been scaled back to more realistic levels. In the Memorandum of December 2012, the Greek government advised that it had adjusted the targets for privatisation proceeds “to reflect recent delays and the general deterioration of Greek asset prices”.

Specifically, it added that “we expect it to take more time (beyond 2020) to realise the full amount of proceeds of €50bn, but we will proceed as quickly as possible. We expect, cumulatively (from June 2011), at least €5.9bn through 2014, €10.5bn through 2016, and €25.6bn through 2020”.

Bankers say they would be sur-prised if the government’s longer term objectives are achieved, even though they have since been tweaked downwards once more, with the troika now expecting privatisation to generate €8.4bn by December 2016 and €22bn by 2020. Just how successful Greece will be in meet-ing these targets, says the Deutsche report, is “anybody’s guess”.

Confidence in the longer term objectives of the privatisation pro-gramme may not have risen follow-ing the experience of 2013, when the target was met only because it was scaled back once again, from an originally planned €2.6bn to €1.3bn. About half of this total was account-

Greece is at last making progress with its privatisation plans. The sale of the site of the Hellenikon International Airport is a crucial part of the programme as it is widely considered an emblem of the broader revival of the Greek economy, that will create thousands of jobs nationwide and bring in both revenues and additional investment. Philip Moore reports.

Hellenikon breakthrough a fresh start for sell-off plan

“In the context of increasing

globalisation, if Greece does not adapt, it will die”

Constantinos Maniatopoulos,

HRADF


PRIVATISATION

ed for by the protracted sale of a 33% stake in the betting monopoly, OPAP, to a Czech-Greek consortium named Emma Delta, for €622m.

The main reason explaining the enforced downsizing of last year’s planned total was the failure of the government to attract any binding bids for the natural gas company, Depa, with Russia’s Gazprom pull-ing out of the running late on. Greece had rather more luck with the gas transmission system operator, Desfa, which was the subject of a €187m bid from Azerbaijan’s Socar.

The fund’s task was not made any easier in 2013 by the enforced resig-nation of its former chairman, Stelios Stavridis, when news broke that he had accepted a ride on the private jet of a member of a consortium bidding for OPAP.

Take off at lastIn 2014, however, the prospects for privatisation appear to have bright-ened. The IMF is assuming that receipts this year will reach €3.5bn, although research published by the ever-bullish Alpha Bank says this total “may easily be surpassed”. Con-fidence in the outlook for privatisa-tion has been strengthened chiefly by the approval by HRAPD of the acqui-sition of the 6.2m square metre site to the south of Athens, which until 2001 was home to Hellenikon Internation-al Airport.

The successful bid, which ended a 27 month tender process, was made by the local Lamda Development and the cosmopolitan Global Investment Group, whose partners include Al Maabar of Abu Dhabi, China’s Fosun Group and a number of European investors.

According to Lamda, an investment of about €7bn will transform the site of the old airport into the largest pri-

vately owned investment project ever in Greece. This will involve the con-struction of a number of shopping centres, hotels, offices, theme parks, museums and other facilities. The direct investment amounts to €915m for the acquisition of 100% of the share capital of Helliniko SA and a further €1.25bn that will be ploughed into the development of “social infra-structure” on the site.

Lamda says that the project is expected to create some 50,000 new jobs between 2014 and 2025, generate about €2bn in annual tax receipts for the government and attract 1m addi-tional tourists each year to the Great-er Athens region.

“To me, the Hellenikon develop-ment is the most important project in the entire privatisation programme because it is emblematic of the broad-er revival of the Greek economy,” says Maniatopoulos. “There are plenty of risks associated with the project, but I believe it will represent a new era not only for Athens, but also for Greece. It will help to create jobs nationwide in the construction industry, which seemed to have such a bright future at the time of the Athens Olympics, but has suffered very badly over the last three years.”

Independent observers agree. “The Hellenikon project is a big step for-ward not so much because of the direct revenues it will collect, but for the additional investment and job

creation it will support,” says the Athens-based investment consult-ant, Miranda Xafa.

The next landmark in the priva-tisation programme, says Maniato-poulos, is the planned sale of the two key ports of Piraeus and Thes-saloniki. “We’ve had six expres-sions of interest for Piraeus, the sale of which we hope to finalise by the end of this year,” he says. “We have a deadline of early June for expressions of interest for a major-ity stake in the Thessaloniki Port

Authority.”The port sales, adds Maniatopou-

los, are part of a blueprint for privati-sation across the broader transporta-tion sector. “We are aiming to extend privatisation to companies such as the railway operator, Trainose, the rail service provider, Rosco, and sev-eral regional airports,” he says. “But I would like to highlight again the privatisation of the ports because of

their contribution to the develop-ment of Greece as a trans-shipment centre and the promotion of foreign investment in the tourism sector.”

Urgent reforms for energyEnergy has also been identified as a priority sector for privatisation. As the EC says in its most recent review, reforms across the energy sector are “urgently needed” as high power costs are affecting the competitive-ness of the economy and the welfare of households. A plan to restructure and privatise the electricity utility, PPC, which includes the spin-off and sale of 30% of its production capaci-ty — the so-called “small PPC” — was drawn up by the government in May 2013, and is reported by the EC to be progressing well. France’s EDF is one notable company that has reported-ly expressed interest in the PPC sale, which is due to be completed by the end of 2015.

Analysts say that they expect the Greek privatisation programme to be boosted by the recent demonstrable improvement in sentiment among bond and equity investors towards Greece. Xafa says that as long as Greek government bonds were yield-ing 8.5%, any private sector investor weighing up an investment in Greek listed or private equity incurred sub-stantial opportunity costs. With the Greek government curve no long-er severely mispriced, she says, the double-digit yields at which investors would look to discount investments in Greek companies will come down to much more digestible levels.

As with the wider economy, a potential fly in the ointment for Greece’s privatisation plans is politi-cal uncertainty. When the govern-ment submitted its bill for the priva-tisation of the energy transmission company, ADMHE, in January, the main opposition group, Syri-za, released a menacing statement pledging that “New Democracy and Pasok will be held accountable for the crime”.

Maniatopoulos shrugs off the polit-ical threat to the privatisation agen-da. “We all know what Syriza is say-ing,” he says. “But I think that even the opposition recognises that priva-tisation is not a question of political choice but of economic reality. In the context of increasing globalisation, if Greece does not adapt, it will die.” s

“The Hellenikon project is a big

step forward for the additional

investment and job creation it will

support”

Miranda Xafa, independent

consultant


FOREIGN DIRECT INVESTMENT

STEPHANOS ISSAIAS, chief executive of Enterprise Greece, is unequivocal about why the country needs to max-imise inward flows of foreign direct investment (FDI). Revenue generation for the government, transfer of tech-nology and knowhow, and support-ing the diversification of the country’s industrial base will all do no harm in helping to accelerate Greece’s eco-nomic recovery.

But more important than all these benefits will be the job creation that Greece so urgently needs if it is to gen-erate sustainable long term growth. “The crisis took an incredible toll on jobs, so we need to create new employ-ment opportunities,” says Issaias, who took up his role at Enterprise Greece in September 2012.

The superficial statistical data would suggest that Greece has already made impressive headway in attract-ing rising inflows of FDI. In 2013, says Issaias, Greece saw rises of 63.6% in gross and 43% in net FDI inflows. This growth came from a very low base. According to UNCTAD, in 2010 Greece accounted for 1.9% of EU GDP but for just €26.2bn of inward FDI, which was less than 0.5% of all inflows into the EU. Of this total, more than a fifth came from Luxembourg, in the form of transfers of funds from financial institutions.

Issaias puts these weak inflows into their historical context. “It is impor-tant to understand that Greece has traditionally been a country that had in effect been closed to foreign invest-ment,” he says. “We succeeded in erecting all sorts of artificial barriers to entry in the form of bureaucratic inef-ficiencies and other disincentives.”

Others echo this view. “One reason why foreign investors have been so reluctant to come to Greece was that they had no way of knowing what their average tax liability would be over the next five to 10 years,” says professor Gikas Hardouvelis, chief economist at EFG Eurobank. “Once more transparency is added to the tax system, Greece will look much more

attractive to investors.”There are two very different ways

of interpreting the recent rise in FDI inflows to Greece. A glass half-empty interpretation is that much of it has been driven by hedge funds and other international invest-ment groups that have been trawl-ing Greece for assets at knockdown prices. Notable recent examples have included acquisitions made by groups such as the Canadian invest-ment fund, Fairfax Holdings, and US hedge funds, York Capital Manage-ment and Third Point.

“The speed of the turnaround in Greece has been impressive and the successful bond issue was certainly a positive indicator,” says George Zois at Exotix in London. “But the reality is that most of the money coming into Greece is still predominantly specula-tive. It is not generally the sort of FDI that is going to build factories, increase the country’s productive capacity and create jobs.”

Regional investment hubThe alternative view of recent inflows of FDI into Greece is to focus on some of the initiatives announced by a number of multinational com-panies which are starting to gener-ate skilled jobs in a range of sec-tors. Nokia, for example, has recently opened a research and development centre which will create 150 jobs for Greek engineers. Microsoft is estab-lishing a regional customer support centre employing 550 people. And Coca-Cola is planning to invest €1m in a consumer interaction centre in Athens which will cover several coun-tries in central and southern Europe, underscoring Greece’s credentials as a regional hub for direct investment.

Aside from the obvious benefits these investments bring in terms of job creation, they are important in that they represent encouraging diver-sification away from the sectors his-torically regarded as the most appro-priate for FDI into Greece, which are tourism, real estate and agriculture.

“We’re now seeing the reversal of a trend which for 25 years saw multina-tionals moving their production out of Greece,” says Issaias. “The fact that these companies are now moving pro-duction facilities back into Greece is fascinating. It shows there is a change in the narrative of the Greek econo-my which is moving from one built on consumption fuelled by cheap loans to one that will be based around exports and FDI.”

That shift, Issaias believes, will also be supported by rising FDI in areas such as logistics. “The logistics sector wasn’t even on investors’ maps three years ago,” he says. “Following the recent Cosco/ZTE deal, we expect to see an explosion of activity in this sec-tor over the next few years.”

China’s influenceThis is a reference to the agreement recently signed by two Chinese com-panies — the shipping giant, Cosco, and the telecoms equipment com-pany, ZTE — to use the Greek port of Piraeus as a European logistics cen-tre for the wider southern Europe-an region. The agreement marks the first phase of ZTE’s long term invest-ment programme in Greece, which is expected to create 600 jobs over the next three years.

The agreement is also significant, says Issaias, because it underscores the increasing geographical diversi-fication of FDI being channelled into Greece. “Europe has traditionally been by far our most important part-ner in terms of inward investment,”

The Greek economy is shifting from a dependance on consumption fuelled by cheap loans to a stronger foundation of a more diversified industrial base, producing exports and attracting foreign direct investment. Philip Moore reports on the moves to establish sustainable long term growth.

Opening up Greece’s economy to the outside world

“The Greek economy is moving

from one built on consumption fuelled

by cheap loans to one based around

exports and FDI”

Stephanos Issaias, Enterprise Greece


FOREIGN DIRECT INVESTMENT

he says. “But we’re now seeing much more interest among investors from North America, the Middle East and, of course, China.”

As well as building on the fast growing trading and investment links between Greece and China, the Cosco/ZTE agreement is anoth-er landmark in the continued redevelopment of the Piraeus Port Organisation (OLP) and Piraeus Container Terminal (PCT), manage-ment of which was taken over by Cosco in 2009.

Over the next three years, Piraeus is expected to leapfrog ports such as Valencia and Algeciras to become the busiest in the Mediterranean, with its growth underpinned by a €230m investment programme by Cosco, lift-ing capacity at the port to 6.2m TEUs a year, compared with 2.1m in 2012.

Another key sector identified by Issaias as a source of job creation is energy, with the Trans Adriatic Pipe-line (TAP) the most important exam-ple. TAP will transport natural gas from the Shah Deniz II field in Azer-baijan to southern Italy and west-ern Europe via Greece and Albania. “This is an emblematic deal which represents an investment in Greece of €1.5bn and will create 2,000 jobs directly and more than 10,000 indi-rectly,” says Issaias.

Issaias says he is convinced that the increase in FDI flowing into Greece over recent years is set to continue, as investors increasingly recognise that the country offers a hybrid of attractions enjoyed by developed and emerging markets. He insists that FDI into Greece is not just a reflection of investors capitalising on relatively low costs.

“On the one hand, companies com-ing to Greece today are investing in a developed economy with an effi-cient infrastructure and rule of law, an established and deep-rooted democ-racy and a highly skilled workforce,” he says. “On the other, they can par-ticipate in economic growth usually associated with emerging rather than developed markets.”

Issaias says this appeal has been reflected not just by rising inflows but also by an increasing number of repeat investments in Greece. As an example of a serial investor, he points to Canada’s Fairfax Holdings. In addi-tion to acquiring a 5% stake in Myt-ilineos, which runs the largest alu-

minium smelter in southeast Europe, Fairfax has recently increased its investment in Eurobank Properties. More recently still, it has snapped up a holding in the retailer, Pratiker Hellas, which has 14 stores and employs 1,100 people in Greece. This is viewed as an especially significant investment, given that it appears to be a vote of confidence in the beleaguered Greek consumer.

Political riskAnalysts say, however, that there is still a discouraging range of disincen-tives for FDI in Greece, all of which will need to be addressed if the coun-try is to generate sustainable inflows of long term investment. At the top of the list is continued uncertainty over the political outlook. “I would argue that politics remains the number one risk in Greece, with recent polls still suggesting that there is uncertainty about what sort of coalition govern-ment we’re going to see after next year’s presidential elections,” says Athanasios Vamvakidis, Greece econ-omist and head of European G10 FX strategy at Bank of America Merrill Lynch in London.

Issaias says that the feedback he is being given by investors suggests that concerns over the political out-look are reced-ing. “When I took up this position in 2012, the coali-tion government — which in itself was a novelty for Greece — had only been in place for four months,” he says. “At the time, people would start their conversa-tions with me by

asking if the government would sur-vive until Christmas, because they were uneasy about redenomination risk. Since the end of 2012, this has not resurfaced as a concern.”

Leaving aside investors’ unease about politics, there are also misgiv-ings about Greece’s legal and physical infrastructure. “There is still a whole set of constraints to do with red tape that need to be dealt with if Greece is to attract more investment,” says the Athens-based economic consultant, Miranda Xafa. “It is still too expen-sive to fire people, and the tax sys-tem changes constantly, which makes it very difficult to make long term investment decisions.”

More broadly, economists say that the country’s lowly position in the World Bank Doing Business Index is a reflection of the challenges investors still face in Greece. In the latest rank-ing, Greece is an unflattering 72nd, a few places below countries like Azer-baijan and Ghana. The same index suggests, unbelievably, that it is more difficult to register property in Greece (which ranks 161st) than Chad, which ranks bottom of the overall index.

“I’d argue that surveys like the World Bank Index are a classic case of indicators that can be regarded as glass half-full or half-empty,” says Issaias. “If you look at our position in isolation of course it’s not where we want to be. Alternatively, you could look at the fact that we’ve climbed 28 places in the general ranking over the last two years, or that we’ve risen 110 positions in the ranking for estab-lishing a new business. We have also been ranked first in terms of fiscal adjustment and first in labour costs in southeast Europe.” s

“Politics remains the number one

risk in Greece”

Athanasios Vamvakidis,

Bank of America Merrill Lynch

0

1

2

3

4

5

6$bn

2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012

Outflows of foreign direct investment Inflows of foreign direct investment

Outflows and inflows of foreign direct investment

Source: OECD Factbook 2014


THE ROLE OF THE TROIKA

“THE AUSTERITY policies associated with the debt crisis are not imposed on Greece by the troika,” declared Alex Tsipras, president of the anti-austerity Syriza Party in a speech in London last year. That is hogwash. But it is easy enough to understand why the Greek opposition should grasp every possible opportunity to deflect popular resentment of the troika away from Greece’s official creditors and towards the ruling coalition.

For very obvious reasons, there is no love lost on the streets of Athens for the triumvirate of the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Commission (EC) which has been so instrumental in defining the terms of the Greek rescue package since the agreement in May 2010 on the first three year economic adjustment programme. Bail-out programmes of €200bn come with strings attached, which is why bankers joke that it is perhaps unwise for people in smart suits to congregate in groups of three in certain parts of Athens.

Dimitris Malliaropoulos, chief economist and director of economic analysis and research at the Bank of Greece, says that most Greeks view the troika as a necessary evil. “The adjustment was imposed on Greece by the troika,” he says. “Given that a typical middle income family has suffered a 30% decline in wage income, and an additional increase in taxation of close to 10% on top of that, it is natural that there has been a reaction against it. But most people realise that there has been no alternative, and there is a growing belief that

we are nearing the end of the painful adjustment.”

The recognition that Greece has had no choice but to swallow the Troika’s medicine is emphasised by investors. “One thing is certain,” says Jörg Warncke, portfolio manager at Union Investment in Frankfurt, “this is that without the official support of the ECB, the EC and the IMF, Greece will have no chance of regaining sufficient credibility to attract private investment.”

Pragmatism and stoicism towards the troika is not shared by all sections of the Greek public. A shadowy anarchist group named Revolutionary Struggle claimed responsibility for a bomb that exploded outside the central bank in the small hours of the morning of April 10. While the press reported that this was timed to coincide with Greece’s successful return to the bond market, central bank insiders say it was more likely that it was aimed at the IMF’s delegation in Athens. The irony, they add, is that while the device caused some damage to the building, none was done to the IMF’s office, which is sensibly located on the eighth floor, a safe distance from the street.

Unrealistic numbers, unrealistic targetsTroika representatives are probably more in danger of being shouted out, or having insults about them daubed on walls, than of being blown up by anarchists. That is just as well, because since their arrival in Athens they have had their work cut out simply to source reliable information. “The story goes that when they

asked on their first day how many government employees there were in Greece, nobody could tell them,” says one Athens banker. “When it arrived here, the troika had no idea of how many reforms Greece needed.”

Shortage of reliable data may be one reason why bankers say that some of the performance targets set by the troika have been unrealistic. Foremost among these was its original requirement that the Greek government generate €50bn of receipts from privatisation between 2011 and 2015, which has since been drastically scaled back.

In theory, failure to meet targets for privatisation receipts can trigger demands by the troika to make up for the shortfall by calling for more cuts in public spending, higher taxes, or both. In practice, the recognition by the troika of the sacrifices that have already been made by Greek society is likely to put the brakes on more austerity measures.

Nevertheless, against that backdrop, it is little wonder that discussions between the troika and the Greek government have been delicate and, at times, protracted. Having already extended history’s biggest bail-out

The ECB, the EC and the IMF might be unpopular on the streets of Athens, but without their support Greece will stand little chance of regaining sufficient credibility to attract private investment that will eventually allow the country to stand on its own two feet. Philip Moore reports on the impact of the troika and what it plans to do next.

Troika medicine begins to work as Greece shows improvement

“Without the support of the ECB, the EC and the IMF, Greece will have no chance of regaining sufficient credibility

to attract private investment”

Jörg Warncke, Union Investment


THE ROLE OF THE TROIKA

since those discussions first began in 2010, the troika’s most recent review began last September and dragged on for seven months. Finance minister Yannis Stournaras, who seems to have spent much of his tenure since mid-2012 engaged in negotiations with the troika, publically described the seven months as having been “very difficult… the hardest review yet”.

Bankers say that the length of time it took for the last review to be agreed was not just a reflection of differences in opinion between the Greek government and the troika on topics ranging from property taxes to the capital requirements of the Greek banks. “It’s worth remembering that the troika is made up of three entities which are staffed by very able bureaucrats but which have varying agendas and priorities,” says one banker. “There have been lots of disagree-ments within the Troika itself about the implementation of the programme.”

On scheduleThe most recent discussions concluded in March with the reaching of an agreement unlocking €8.3bn of the final instalment of the €240bn bail-out funding that had been withheld by Greece’s creditors as discussions about the speed of reforms faltered. The Greek government insisted that the agreement was not contingent on any new austerity measures or cutbacks in spending and its hand was strengthened by the primary surplus that it achieved, ahead of schedule, in 2013 and the first quarter of 2014. That has allowed Greece to use some of the surplus to distribute a so-called “social dividend” to vulnerable sections of society, in spite of the reported opposition of some of troika’s representatives.

The following month, the European Commission published its fourth review on the second economic adjustment programme for Greece. Released after four joint troika missions to Athens — the most recent of which was in February and March — the review

gave the reform programme a broad endorsement.

Greece, says the report, has made “delayed, but eventually substantive” progress since the publication of the last review, exceeding its fiscal target, reaffirming its commitment to achieving a primary surplus of 3% of GDP in 2015, and making headway in key areas such as fighting tax evasion and corruption. The review also acknowledges “the crucial reforms of the Greek public sector, notably the rationalisation and modernisation of the public administration”, observing that there has been an above target reduction of more than 20% in the number of general government employees.

“This notwithstanding,” says the commission’s review, “very substantial improvements in public administration are still needed to bring Greece in line with best practices.”

The progress made in the economic reform programme and Greece’s recent return to the capital market leaves a number of bankers confident that it will not need a further bail-out. “One of the reasons it was so important for Greece to demonstrate that it has regained market access at a reasonable price was that the pressure is on to show that it can follow in the footsteps of Ireland and Portugal and exit the financial programme,” says Håkan Wohlin, head of global debt origination at Deutsche Bank.

Others agree that the chances of a third bail-out have receded sharply in the past six months or so. “I believe Greece has now entered a near virtuous cycle,” says Murat Ulgen, CEEMEA economist at HSBC in London. “The primary surplus, the return to positive growth and Greece’s return to the capital market are all creating an environment in which there is likely to be more debt relief, in the form of extended maturities and reduced interest rates rather than a notional haircut.

“This will further alleviate the debt burden and entrench the virtuous cycle,” he adds. “This

in turn will mean that Greece possibly won’t need a third memorandum and will be able to exit the troika programme sooner than expected.”

Exit strategyCertainly, Greece has already ticked most if not all of the boxes that were identified in the IMF’s debt sustainability analysis (DSA) in 2011. This observed that “public and external debt sustainability hinges critically on full and timely implementation of fiscal, privatisation, and structural reforms, macroeconomic developments in line with programme projections and the restoration of market access at reasonable terms in the post-programme period.”

Bankers say that the next key stage in Greece’s discussions with its international creditors will come in the summer. “As we head towards the autumn, the troika will want to hear more details about how the government plans

to bridge its financing gap in 2015 and 2016,” says Ulgen at HSBC.

This gap, which has been put by the EC at €2.6bn this year and €12.3bn in 2015, is regarded as manageable. One of the findings of a recent Deutsche Bank investor trip to Athens was that some observers “expressed the opinion that the [IMF/EU] programme provides useful anchoring on both the fiscal and structural reform fronts”.

“However,” the Deutsche report adds, “we got the sense that if officials were able to raise sufficient money to cover IMF funding, early exit would not be shunned. Politically, it would be a big win for the government.” s

“The pressure is on Greece to show that

it can follow in the footsteps of Ireland

and Portugal and exit the financial

programme”

Håkan Wohlin, Deutsche Bank


INTERVIEW WITH THE BANK OF GREECE

: How comfortable are you that the primary surplus is sus-tainable? Given that one-off items contributed to the 2013 surplus, is it realistic to expect a surplus of 4.5% in 2016?

Dimitris Malliaropulos: We see the primary surplus as sustainable, as it has been achieved in a period of declining economic activity, which is negative on the revenue side.

We have had a number of increas-es in marginal taxation over the last few years, and a broadening of the tax base due to the introduction of prop-erty taxes. Going forward, if we see economic activity increasing, we will also see the benefits of this enlarge-ment. Even if expenditure remains at its current trajectory we will likely see an over-performance coming from the revenue side.

So although much will depend on tax receipts over the next few years, it is likely that the budget targets for 2015 and 2016 will be met, which means we will reach our long term objective of a 4.5% primary surplus.

Also, the 4.5% target is based on projections of interest payments and debt maturities which are likely to change if further debt relief measures are introduced. Fiscal targets will be easier to meet if debt as a percentage of GDP declines faster than currently projected.

: So the next step in the debt discussions is for more con-cessions in terms of maturities and interest payments?

Malliaropulos: Yes. OSI in the form of a haircut is out of the question at the moment. Maybe in five or 10 years’ time the discussion will come up again, but it is not on the agenda today.

: What about the revised targets for privatisation receipts? Are they achievable?

Malliaropulos: Privatisation is now getting into its stride. The Hellenikon

transaction is an important step forward in that respect. How achievable the targets are will depend a lot on market senti-ment and on the valuations reached by inves-tors, but I don’t think a target of €20bn-€25bn is unreasonable.

: How realistic is the expectation of a transformation of Greece from a domestic driven to an export based economy? Can this only happen if structural reforms are pushed through?

Malliaropulos: A number of struc-tural reforms have already been pushed through, the most important of which is the liberalisation of the wage bargaining process, which has changed the labour market by mak-ing it much more flexible. It has also improved the outlook for invest-ment and economic growth.

There are several calculations of the benefits of structural reforms in terms of potential growth. Esti-mates from several studies, includ-ing those from the OECD and the EC, point at an additional growth impact of 1.5%-2% a year for the next 10 years. Our estimates are slight-ly lower, but it is clear that struc-tural reforms will support long term growth.

It is likely that the economy will rebalance into a new growth model based on exports and investments. Over the past few years, we have seen a change in the relative prices of tradeables versus non-tradea-bles. The rise in the price of tradea-bles is a good precondition for the improvement in the performance of exports.

We have seen a large adjustment in competitiveness, especially in labour

costs, of about 30%-35% relative to our main trading partners, which will gradually be translated into export dynamics. So far we have only seen a partial improvement in exports because of the structure of Greek exports, more than 60% of which are accounted for by services. Half of these are in the shipping sector, which has underperformed in the past few years because of the state of the global economy. This has acted as a drag on total exports.

But exports of goods have per-formed well over the last four to five years, increasing in nominal terms by about 40%, which is in line with the global trend. It’s not unreason-able to expect annual growth rates in exports in the area of 5% over the next 10 years.

Investment has been dragged down because of uncertainty about the outlook for the economy. When this uncertainty vanishes, we’ll see a revival of investment, also at an annu-al rate of 5%. Together with rising exports, this can fill the gap created by lower domestic consumption, lead-ing in the long term to annual growth rates above 2%.

: In the shorter term, what are your views on the poten-tial impact on society and the econ-omy of deflation?

Malliaropulos: We don’t believe deflation will be a long term phe-

In this interview, Dimitris Malliaropulos, the bank’s chief economist, and Spiros Pantelias, advisor to the governor, give their views on the outlook for the Greek economy and banking industry.

Exports and investments to drive Greece’s post-crisis economy

Bank of Greece: confident about economic recovery even if the banking sector is not able to provide

as much credit as in the past


INTERVIEW WITH THE BANK OF GREECE

nomenon. We expect to see some deflation this year but stable pric-es in 2015 and annual inflation of around 1% over the longer term.

Deflation is not as big a threat to Greece as it is to the euro area economy, mainly because we have already had a significant inter-nal devaluation which has reduced nominal wages by about 30%. A small amount of deflation is positive because it supports real incomes and consumption, both of which have suffered over the last few years.

We don’t expect deflation to lead to shrinking profit margins and hence negative supply-side effects on the economy. Profit margins have increased over the last four years, so there is room for a slight decline, supporting consumption.

Of course, there are negative implications over the longer term for debt sustainability because it becomes more difficult to stabilise the debt to GDP ratio in a deflation-ary environment. It is also a nega-tive for southern European econo-mies in general which are struggling to regain competitiveness because it may mean more internal devalua-tions are needed.

Our adjustment in competitive-ness is now behind us. Unemploy-ment will remain high for some time, keeping wage increases low and supporting further improve-ments in competitiveness.

: Moving on to the bank-ing sector, are the banks adequate-ly positioned not just to meet the €6.4bn of capital that they need in the baseline scenario, but also the €9.5bn they would need in the adverse scenario?

Spiros Pantelias: This is something that we have signed off on, so by def-inition we are comfortable with both the baseline and adverse scenarios.

Each of the major banks has now completed rights issues for amounts exceeding what we have calculat-ed as the baseline requirement. Two banks have raised the amounts required for payment on preference shares bought by the Greek govern-ment in 2009.

The completion of these exercises by all four core banks leads to equi-ty raising of approximately €8.5bn, which is an unprecedented amount

for the domestic capital market. In terms of common equity tier

one, Greece’s banks are now capital-ised way in excess of the minimum regulatory requirement. That is higher than any EU average, no mat-ter how you measure it. So their loss absorption buffers are significant.

: Is the Bank of Greece proceeding “forcefully” — as the troika has recommended — in requiring banks to work out their problem assets?

Pantelias: Yes. The management of troubled assets is one of the cor-nerstones of Greek banking sector reform. Along with BlackRock we have completed a full review of the overall process. Based on this review, which was completed in the third quarter of 2013, a series of guidelines and initia-tives have been introduced regarding banks’ operations as well as the debt resolution process both for the house-hold and the corporate sectors. This is a long process that is vital given the size of the problem and the per-centage of non-performing assets on domestic balance sheets, which at the end of 2013 was in excess of 30%.

Unlike in other countries, these NPLs are not confined to a few spe-cific segments. They are closely corre-lated with broader economic activity, which means there are tens of thou-sands of cases of households or other borrowers that require new initiatives and the adoption of a new framework to improve efficiency.

: How do banks reconcile the need to clean up their balance sheets with the requirement to sup-port economic growth?

Pantelias: Two rounds of bank recapitalisation have injected almost €50bn into the system. This has improved the credibility of Greek banks, and over the past few weeks we’ve seen Greek paper accept-ed once again as collateral for the global repo market. This has further improved the banks’ funding capac-ity of Greek banks, by giving them more options for raising liquidity.

Over the nine months following the 2012 election, we had a signifi-cant inflow of deposits into the sys-tem. We have also seen a re-emer-gence of corporate credit extended

by foreign banks in Greece, which also increases the liquidity of domestic banks. All this will help provide the liquidity needed to sup-port the Greek economy, provided there is healthy demand for credit.

In terms of the reliance of Greek banks on the ECB, the record high was in excess of €140bn around two years ago. Now we are close to €60bn. That is an indication of the amount of work that has been done over the past two years, and reflects the improvement in the way in which Greek banks are regarded by depositors and other counterparties.

The banks’ funding from the ECB still exceeds the required threshold. But they have been outperforming in the past few weeks. The senior unse-cured issues from NBG and Piraeus, as well as the equity issues, which were taken up largely by foreign investors, will further help to reduce the banks’ reliance on the ECB.

Malliaropulos: On the topic of financing the recovery, last year large corporates raised about €4bn in the bond market. This compares with a total decline in bank lending of about €8bn. So half of this total was sub-stituted by capital markets, whereas in previous years Greek corporates’ recourse to the capital market was minimal.

There are also significant official sources of liquidity provision, such as the EIB programmes for SME bor-rowing and trade finance facilities, as well as EU structural funds, all of which will support investment. Last year, EU structural funds reached in excess of €4bn.

Companies are also using more internally generated funds. Eco-nomic profitability, defined as added value minus wages and other costs, is now at its peak mainly because of the decline in wages during the recession. So corporates’ retained earnings have increased, which will be used when investment prospects gradually improve.

Also, at the start of an economic rebound from a deep recession, there is plenty of excess capacity, with limit-ed need initially for additional invest-ment to increase production. So we remain confident about the prospects for a recovery even if the banking sec-tor is not able to provide as much cred-it as in the past. s


PDMA PROFILE

BY EARLY April, Greece’s return to the international capital market after its four year exile was widely antici-pated. More surprising, perhaps, was the strength of investor demand for the bond and the terms that the Public Debt Management Agency (PDMA) was able to enjoy as a result. Led by Bank of America Merrill Lynch, Deutsche Bank, HSBC, Gold-man Sachs, JP Morgan and Morgan Stanley, the €3bn five year deal gen-erated demand of more than €20bn from 600 accounts.

This explosive demand allowed the PDMA to print at a coupon of 4.75%, with the bonds re-offered at a 4.95% yield. That was well below ana-lysts’ expectations. A Morgan Stan-ley research note published a week or so before launch, for example, had forecast a coupon in the 5.5%-5.75% range, cautioning that a 5% coupon might cause investor demand to fall below expectations.

In the event, April’s blowout benchmark was supported by the breadth of the investor base that was attracted to the transaction by Greece’s position within an invest-ment universe floating somewhere between investment grade and emerging market territory. “I’ve been in this business for 25 years and I have never seen Greece attract such a huge investor audience,” says Nich-olas Exarchos, head of Greece and Cyprus capital markets at Deutsche Bank.

Its exquisite timing on a number of counts helped the strength and depth of investor demand for the Hellen-ic issue. As well as benefiting from the momentum that has supported declining government bond yields throughout the European periphery, April’s sovereign issue was clear-ly buoyed by international inves-tors’ response to the capital increases completed earlier in the year by the Greek banks.

While the timing was certainly supportive, bankers stress that it is important to recognise the role that has been played by the PDMA in

steering Greece back to the market so effectively.

A very different worldNobody belittles the jobs done by Spyros Papanicolaou, who ran the PDMA from 2005 to 2010, nor by his predecessor, Christoforos Sardelis. But bankers say that over the past four years the challenges faced by the PDMA under Petros Christodou-lou, director general between Febru-ary 2010 and August 2012, and by his successor Stelios Papadopoulos, have been of a very different order.

Papadopoulos, a career banker who spent the previous 17 years at Société Générale, EFG Eurobank, Citi and BNP Paribas, stepped into the posi-tion when Christodoulou moved on to the National Bank of Greece (NBG), where he is now deputy CEO.

“When we became primary dealers back in 2002, the PDMA was typically doing three syndicated deals a year, along with re-openings and manag-ing the T-bill programme,” says Dinos Kamaris, head of global markets and capital financing at HSBC in Ath-ens. “Greece was borrowing between €40bn and €60bn a year, generally at a few basis points over Germany, so for several years it was a case of busi-ness as usual. That model changed in 2009 when the funding requirement shot up to €70bn, and it collapsed altogether in 2010 when yields rose to 7.5% and Greece lost market access.”

Håkan Wohlin, global head of debt origination at Deutsche Bank, adds: “You have to bear in mind that inves-tors lost about €150bn in the NPV of their holdings in the 2012 PSI debt exchange, which led to a different set of investors today and means that Greece’s current creditors are proba-bly a lot more sophisticated than they were 10 years ago.

“I can’t think of any country that has been subject to more intense scrutiny and due diligence than Greece over the last few years. This includes how every decision the PDMA makes may have a profound impact on the domestic banks and

Greece’s relationship with the troika.”Bankers say that discussions

between the PDMA and Greece’s offi-cial creditors have at times been very delicate, with a number of repre-sentatives from the troika reportedly uneasy about Greece returning to the capital market. “My understanding is that Stelios had to do a lot of convinc-ing,” says one banker.

It is just as well that he was suc-cessful, because the funding that Greece raised in April was only one

of a number of objectives that the PDMA had in mind. “Regaining mar-ket access sent out a very important statement about Greece’s recovery,” says Vassilis Karamouzis, head of global market sales at HSBC in Ath-ens. “But the transaction was also significant because by creating a new five year benchmark it was the first step in recreating a liquid yield curve. The result is that it has established a liquid benchmark for private sector borrowers.

“Under the 2012 debt exchange, 20 series of new bonds were issued for a total of around €30bn, which mature between 2023 and 2042,” Karamouz-is adds.

“This means there is about €1.5bn maturing each year, which is much too small for a liquid market. By con-tinuing to issue benchmark bonds, potentially in conjunction with a vol-untary exchange programme, the PDMA will be able to consolidate its yield curve which should lower fund-ing costs for private and public sector issuers.” s

Raising a book of €20bn for a €3bn five year deal via 600 accounts is impressive for any borrower, let alone one that has, over the last four years, been through a vast debt restructuring programme and economic depression. As Philip Moore reports, Greece’s return to the international bond markets not only sends out a key statement about the country’s recovery, but also establishes a liquid benchmark for the country’s private sector borrowers.

PDMA returns in style

Stelios Papadopoulos,PDMA director

general

18 Greece in the Global Marketplace

PDMA Roundtable

: Clearly, the PDMA’s return to the inter-national capital market in April was a phenomenal success. But presumably the funding component of the deal was only a small part of the overall motive for bringing the benchmark. Stelios, can you start by giving us some insight into the wider significance of the transaction?

Stelios Papadopoulos, PDMA: I would say that the fund-ing component was probably the least important part of the exercise. Whatever funding gap there is over the next year, it has been completely covered, and our funding needs are much lower than those of our peers.

We think the most important priority for the PDMA has to do with creating a functional bond market. What Greece has been lacking is a functional bond market or a yield curve that makes sense. So the operations we’re working on now are not to do with raising money but building a yield curve.

The mid-point of the GGB yield curve, between six months and 10 years, did not exist prior to April’s transac-

tion. This is the most important part of the yield curve for a country like Greece which wants to attract fund flows in maturities between five and seven years.

As far as the 10 to 30 year maturities are concerned, that make up the so-called strip, those bond issues are the residuals of Greece’s two massive debt restructuring oper-ations which were the PSI on the one hand and the debt buyback on the other. Both of these operations were chal-lenging and extremely important but also extraordinary.

It’s important to understand that none of the bonds comprising the strip had been issued at par. They were all heavily discounted and were offered more for convex-ity trades than for conventional fixed income trades. The structure of the strip is to a large extent responsible for the fact that the GGB curve looks either inverted or flat. Indeed, if a curve is fragmented or illiquid, and if people buy the whole or part of the curve rather than specific tenors, it’s only natural that it looks flat.

So it was essential for us to have an at-par issue, which would bring shape to the curve, assist in pricing the curve, and therefore help intra-curve trades, such as selling the

Participants in the roundtable, which took place in Athens in May, were:

Nicholas Exarchos, managing director, head of Greece and Cyprus, Deutsche Bank, London

Dinos Kamaris, head of global markets and capital financing, Greece, HSBC, Athens

Vassilis Karamouzis, head of global markets sales, Greece/Cyprus, HSBC, Athens

Stelios Papadopoulos, director general, Hellenic Republic Public Debt Management Agency (PDMA), Athens

Phil Moore, moderator, GlobalCapital

The first peak scaled with bond return, now on to the summit

When Greece returned to the international bond market in April, with a €3bn five year transaction, it was widely hailed as a triumph for the Public Debt Management Agency (PDMA). Not only did the heavily oversubscribed bond announce that Greece had regained market access at a competitive price after just over four years in the wilderness. The successful transaction also represented a pivotal step in the reconstruction of the Greek sovereign’s yield curve. The unprecedented restructuring of Greece’s debt in March 2012 — known as the Private Sector Involvement (PSI) — and the debt buyback that followed at the end of the same year were painful for bondholders, but they formed the basis for Greece’s economic reconstruction. In so doing, they played a significant role in dispelling talk of a Greek exit from the euro.

PDMA Roundtable

Greece in the Global Marketplace 19

five years and buying the strip or vice versa. We also definitely needed to create some homogeneity in the curve which answers a number of other questions — such as why we issued under English law.

We also believed that promoting intra-curve trading would show to investors that there was no question of another PSI, or a buyback of the strip. We did not want to create the impression that the strip was a part of the curve we are no longer interested in. We wanted to make it clear that we were building a curve and that the strip would be an integral part of that.

Vassilis Karamouzis, HSBC: I agree that this was a criti-cal first step in rebuilding the government’s yield curve, which looked very unusual after the PSI, because there was no point between the six months and 10 year segment of the curve. Greece obviously needed to create new points on the yield curve because the market was left to make unscientific interpolations of where bank and corporate instruments with maturities of between six months and 10 years should price.

: What sort of feedback were bankers being given the investor community in the run-up to the trade?

Karamouzis, HSBC: I don’t think Stelios gets enough credit for the work he did with us and with the investors ahead of the issuance. This involved simultaneously pass-ing on the message he was communicating on behalf of the PDMA, spending a significant amount of time with investors under the radar screen, and providing us with a story to start communicating to the investor community. The success you saw at the start of April represented the fruition of an effort that started more than a year ago.

I would say this was a very well managed and well con-trolled process. Investors knew exactly what they were get-ting into and were fully aware of the pluses and the risks associated with the transaction. That’s why interest in the deal was so overwhelming and was exactly what we were expecting. It’s why, a week ahead of the transaction, we were all very comfortable that the deal would be a success.

Nicholas Exarchos, Deutsche: I agree about the success of the transaction. For the sovereign to return just two years after such a large debt restructuring was unprec-edented. It has helped change the way Greece is perceived internationally, which is a very important step forward.

The task looked daunting when we started talking about coming back to the markets soon after the PSI, particularly given the amount of Greek government and troika approv-als and signoffs needed. In close co-operation with us, the

PDMA toiled away over the past year and choreographed Greece’s re-entry into the market to perfection, thus lead-ing to its resounding success.

: I don’t imagine that anyone would dis-agree that it was a success. But were you expecting to generate demand of €20bn or so? And were you expecting a 4% handle on the pricing? In other words, did the success of the transaction exceed all expecta-tions?

Dinos Kamaris, HSBC: The book grew very early in the process. Since it was a relatively small trade of €3bn, I think we were all confident that it would encourage very high participation from investors and a healthy level of oversubscription.

As to the pricing, when a borrower has been out of the market for three years, and is coming into a market which still isn’t functioning efficiently, there is no way of know-ing for sure whether it will be able to price at 4.7%, 5%, 5.5% or whatever.

It was a successful exercise but I don’t think the market has normalised yet. I think that normalisation will come in the second half of this year, as we see more issuers coming into the market in a wider range of tenors. This will give us a much clearer idea of what the Greek market should look like in terms of pricing.

Papadopoulos, PDMA: To be honest, I was expecting the deal to be a success because as Vassilis mentioned, a lot of the preparatory work had already been done discretely and confidentially. This was one of the keys to its success.

However, it is difficult to define success. I suppose the obvious measure of success was to conduct a transaction that would be comparable to similar deals that some of our peers had completed, which I believe we achieved. Another measure was to maximise the diversity of accounts participating, both in terms of numbers and quality, which was another target which we achieved. Indeed, thanks to the banks I think we exceeded expectations on that score.

Having said that, there were a number of additional implicit targets — equally if not more important — that we set ourselves with this issue. To me, the most important of these was to open the market up for other Greek issuers, whether banks or corporates. It was also important to do so at reasonable pricing levels in order to help the banks recapitalise themselves efficiently and also encourage them to lend money to the real economy.

Post the PSI, Greece has principally suffered from a liquidity trap rather than a credit problem. This becomes very clear if you think about the main features of Greek debt. Since the restructuring of 2012, 80% of the debt has been held by our European partners, so it does not bear the usual characteristics of sovereign debt, in that the cost of debt servicing is quite low and its average maturity is the longest in Europe.

Besides, the progress that was made on several fronts on the economy, especially in key numbers such as the current account and the primary surplus, as well as in structural reforms, has been reassuring for investors. No matter what people say, Greece has been at or near the top of OECD rankings in terms of structural reforms.

The obstacle that has stood in the way of Greece in the international market has been our infamous debt to GDP ratio of 175%. However, the more detailed our discus-sions with investors became, the more we discovered that a large number of them — especially those that had not been traumatised by PSI — believed that the debt to GDP ratio is an irrelevant indicator on its own for measuring the sustainability of Greece’s debt. This is because we’re not

Vassilis Karamouzis HSBC

PDMA Roundtable


talking about debt with an average maturity of five or six years, but one of almost 18 years. This will most probably be extended even further in the future, in line with the decisions made by the Euro Group in November 2012.

: In other words, there is virtually no roll-over risk?

Papadopoulos, PDMA: Exactly. We also believe that the definition of debt to GDP per se has a teleological mean-ing. In other words, each and every market participant interprets the debt to GDP according to its own needs and its own purposes. For the PDMA, which will need to manage the debt for the 20 or 25 years to come, the debt servicing cost that we will incur over that time is by far the most important figure.

If I showed you a table of maturities of Greek debt to 2020, and invited you to show me a point in time we’re likely to default, you’ll find none. So this discussion may be a theoretical and interesting one. But 80% of the debt right now is held by the official sector, by which I mean our European partners. And the debt’s maturity is likely to be extended to a level that makes refinancing risk irrel-evant.

There is also an important link between the recapitali-sation of the banks and the overall debt. Remember that the original bail-out package included €50bn that was provided to the Hellenic Financial Stability Fund to help rebuild the financial system. In other words, rather than being extended directly to the banks, the European aid to recapitalise the banks was channelled through the state, temporarily increasing the sovereign debt.

So the net debt of Greece is actually quite a lot lower than the official data suggests, because at a certain point in time this €50bn will be redeemed. Early recapitalisa-tion means an earlier return to operations and the earlier ability of the state to repay a portion of the debt through a re-privatisation of the banks. This is why it was crucial that the banks were recapitalised on time.

We should also not forget that regaining access to the market has helped to reduce dramatically the cost of debt servicing in the T-bills market. We have a stock of T-bills of about €15bn in the market, which were priced at 4% because they are the only tool in the Greek yield curve which was issued at par. Therefore, instead of being priced as cash instruments, they were priced as credit instruments and suffered from an important credit spread. Before the five year issuance, there was no other at-par credit instrument in the Greek debt curve.

Releasing the internal credit value of the strip, through the April at-par issuance, has also led the yield on the T-bills to fall to almost 2%. Our most recent issue was priced at a yield of 2.13%, which is a high rate for a cash instrument but is below on the 4% or 4.2% level we saw previously. So the T-bills are now more like a hybrid of cash and credit instruments.

: For all the above reasons, was the troika supportive of the deal, or was there some resistance to it given that the cost was obviously higher than official sources?

Papadopoulos, PDMA: The discussion with the troika was a continuous process. Understandably, the troika will always want to scrutinise debt operations. Not being a market player itself, it will be initially sceptical. But initial scepticism has now given way to supportive discussion.

The critical parameter for the troika, perhaps correctly so, was the fourth review. It believed that we needed to finish the last review, which was extremely important,

before we accessed the market. The negotiations between the government and the troika were lengthy and at times quite tough, but ultimately successful. That agreement cre-ated an environment which was conducive for issuance.

: More generally, the timing of the deal was marvellous, wasn’t it? You had a combination of falling yields across southern Europe, continued discussions about QE in the eurozone and the release of positive macroeconomic data from Greece on the primary surplus. At the same time, it was still long enough before the European elections for investors not to be too fixated on the political dimension. So all in all, the timing could hardly have been better.

Papadopoulos, PDMA: Yes, the issuing environment was good. The review had been successful, and to be honest it was fair that Greece was given the chance to capitalise on the progress that it had already made in the economy.

If you had compared Greek yields with those of some other European countries four months before the April transaction, they were much higher. This yield differen-tial, mainly a reflection of the inefficiency of the strip and the technical aspect of investors’ trading opportunities, definitely outweighed the progress Greece had made on an economic level. Put another way, Greece did not offer a market instrument which could properly reflect the progress of its reforms.

Which brings me to another reason why an issuance was so important for Greece. This issuance was a way to restore the credibility of Greece in international capital markets and allow the markets to assess in real time the progress made in the real economy as a result of the reforms, both fiscal and structural. What Greece was miss-ing before the issuance, compared to other countries in bailout programmes, was this kind of market assessment. For the reasons mentioned before, the strip couldn’t properly reflect the improvements made in the economy. Therefore the only possible assessment of the progress was through a compliance scorecard against a list of reforms, a list that was much longer, more exhaustive and more detailed than for other similar situated countries. The April issuance provided an additional, real-time mar-ket assessment of the progress achieved so far.

: Nicholas, can I bring you in here, by being slightly provocative? Is it true to say that the demand for Greece’s benchmark in April — and for other Greek issues such as the bank recap deals — was underpinned by improving fundamentals? Or were investors attracted purely by technicals, and by the momentum that has been supporting all the

Stelios Papadopoulos PDMA

PDMA Roundtable


peripheral markets of the eurozone?

Exarchos, Deutsche: Yes and no. Everyone agrees that the Greek economy is still a work in progress. But if you look at where Greece was a year or two ago compared to where it is today, it is clearly in a much better place. Nobody believes Greece will now stop making progress from an economic perspective. On the contrary, it will accelerate the process.

Greece isn’t climbing a hill. It is climbing Everest, and it is already three-quarters of the way up. So nobody can accuse Greece of not having made sufficient effort on the economic front. While the technicals supporting the deal were obviously important, I think its success was also a reflection of this progress and of Greece’s commitment to longer term growth and debt sustainability.

Papadopoulos, PDMA: Allow me to be provocative as well. I wouldn’t compare the Greek economy of today with the economy of 2009 or 2010. I would prefer to compare it with the economy of 2004 or 2005, when everybody was investing fervently in GGBs.

Which economy do you think is stronger? The economy of 2005 or the economy in 2014? I don’t remember the Greek economy having a current account surplus in 2005. It doesn’t matter as much how we have achieved the cur-rent account surplus we have today, or whether it is the result of a decline in imports or interest rate payments rather than a rise in exports. The point is that Greece has made fiscal and structural reforms on a continuous and consistent basis for a number of years, which are now being reflected in the performance of the economy.

As you suggest, of course the deal we did in April was to some extent based on the overall momentum in the inter-national capital markets. Identifying the right timing to launch such a transaction was a critical component of our overall strategy. However, the success of the transaction can not only be attributed to the right timing or to techni-cal market features. Six hundred participating accounts in the April issue, more than €20bn of demand, and 50% of the issue allocated to real money accounts, underscore that investors looked at the numbers and acknowledged the progress made by Greece, rather than at some of the stereotypical views about the Greek story.

For instance, a stereotypical view is that Greece has achieved a lot, but there is still a lot more to be done. What is missing from this sentence is the objective. In other words, what is it that we need to achieve and for which a lot more needs to be done? Is our goal to make growth sustainable? Is our goal to bring the debt down to below 100% of GDP? Is it to create an AAA economy? To have access to the market? All of the above? Shall we wait for these goals to be achieved before Greece taps the market again? Have other countries with regular access to the markets achieved these same goals?

I wouldn’t argue that we have completed the struc-tural reform programme, but one should not forget that in democracies, reforming an economy is a continuous process and the timing of the reforms is crucial. The keys to success are defining the objectives pursued each time, prioritising the reforms and evaluating what needs to be done and when.

: But surely there were important imme-diate priorities, such as making the price of pharma-ceuticals the same in Greece as in Spain, perhaps? Or allowing shopkeepers to open their doors on Sundays?

Papadopoulos, PDMA: Yes indeed — but the relative

value of the reforms you just mentioned should not pre-vent us from restoring proper access to financing. Is the full implementation of these reforms really a prerequisite for Greece to access the markets? I’m not saying that mea-sures like these don’t need to be undertaken. But nobody mentioned reforms such as these in 2004 and 2005, for instance, when everybody was heavily investing in GGBs.

Foreign direct investment into Greece has always been at very low levels. If we can now create a pace of privatisa-tion and a flow of FDI because financing is again available following our return to the markets, assets are competi-tively priced and labour costs are low, that is surely more important in terms of promoting growth than whether shops are open on a given day or at given hours.

If we can go from a negative growth rate of 4% to a positive rate of 0.6% within a year — as current estimates suggest — even though we did not have access to the markets for part of this period, then this indicates that current policies are bearing fruit and that Greece is worthy of investors’ attention.

I agree that reforms are important, but there are other considerations which, for investors, are equally if not more important. For instance, investors may find it more important to have a sustainable growth rate of 1.5% driv-en, say, by a four-fold increase of traffic through the Port of Piraeus, rather than reforming the price of milk. Don’t get me wrong: the price of milk is extremely important to Greek citizens on a daily basis. But investors should look — and are looking — much more at the growth potential of the economy at large rather than at standalone issues.

Exarchos, Deutsche: We shouldn’t underestimate what has been achieved in terms of reforms. I think a lot of people underestimated how much needed to be done when the EU-IMF programme began. Greece has passed hundreds of reforms already, but when your house is on fire it is natural to focus on extinguishing the main blaze before turning to the smaller flames.

: Going back to what Stelios said about attracting FDI and accelerating privatisation, presum-ably this touches on another important by-product of the PDMA’s bond issue, which is that the re-pricing of the government bond market will help investors in the privatisation process?

Papadopoulos PDMA: It is evident that the recent issu-ance not only restored Greece’s standing with internation-al capital markets and lowered sovereign bond yields. It also had, and is expected to have, further positive impact on the financing of the real economy, and the bolstering of depositors’ trust towards the domestic banking system,

Nicholas Exarchos DEUTSCHE BANK

PDMA Roundtable


leading to an increase in bank deposits and, as a result, higher liquidity conditions in the markets.

Moreover, not surprisingly, following the recent five year issuance, recapitalised Greek banks regained access to the international capital markets, while an increasing number of large Greek enterprises have issued corporate bonds.

These trends are expected to continue and intensify in the near future and they constitute an absolute prerequi-site for the attraction of private financing, especially from abroad, in order to realise privatisations which can be successful only through fair valuation of public property (we don’t seek for fire sales here) and allow FDI. Under the current circumstances it is even more important to attract foreign investment — both direct and indirect — in the country and thus create synergies leading to increased productivity that is critical in the current conjunction.

Exarchos, Deutsche: Clearly, a working yield curve, as opposed to a broken one, will help investors, banks and funds price their discounted cashflows more accurately when looking at opportunities and investments in Greece, and speak the same language.

A couple of months ago nobody looked at the strip because everyone agreed it was not priced correctly. Essentially, there was no benchmark and every player had a different private yield curve for Greece. This created a lot of confusion and disagreement amongst the different parties, all of which were speaking a different language at the time.

Karamouzis, HSBC: I don’t think there is any economy in the world that has been put under the magnifying glass as intensively Greece has. The truth is that investors now have a very clear picture of what they are buying in to. For investors, a big part of the decision on whether or not to buy into Greece is their view on whether or not the Grexit story is over. If you are convinced that Grexit is no longer on the agenda, buying Greece at 5% is a no-brainer, because the differences between Greece and other economies trading at 2% or 2.5% are not that significant to justify the premium.

: Does that suggest that there is room for outperformance in the secondary market?

Karamouzis, HSBC: Yes. I think there is.

Exarchos, Deutsche: Yes. Provided the country is seen to be keeping its foot on the reform pedal, of course the mar-kets will continue to take an interest in Greece. However, the onus is on Greece as any jitters created by a small deviation from its reforms will be magnified — given that as Vassilis correctly mentions, it is already under the magnifying glass.

: Vassilis mentioned Grexit. Is it now safe to assume that the Grexit discussion is completely off the table? Or is there still some element of political risk priced into the market?

Kamaris, HSBC: I think this brings us back to the discus-sion about what has been achieved in Greece over the last three years. This has seen us achieve a primary sur-plus and address the chronic disease of Greece’s current account deficit that has been changed into a surplus.

There is still a lot to be achieved in terms of economic adjustment and structural reforms. But compared to what people were thinking back in 2011 and 2012, the outcome of what has been achieved so far is extremely

positive.Coming to the Grexit question, of course there is still

some element of political risk priced into the market. But none of the main political parties are seriously discussing the possibility of Greece leaving the eurozone. Political risk is declining as the prospects for the economy are improving.

: Syriza hedges its bets on the euro, doesn’t it? Its official line seems to be that it is not opposed to Greece staying in the euro, but at the same time it says that it will not tolerate a continu-ation of the austerity measures. It’s hard to see how those two commitments can be reconciled, isn’t it?

Exarchos, Deutsche: But Syriza is also perfectly aware that a Grexit would not be able to restore Greece’s financial sovereignty for many years. It’s natural for back-benchers in Parliament to make a lot of noise, but those backbenchers don’t reflect the opinion of the majority of Greeks. If you look at the most recent opinion polls, something like 70% or 80% of the electorate believes that Greece should remain within the euro.

: So the answer to the question seems fairly unequivocal — which is that Grexit is off the agenda?

Papadopoulos, PDMA: Yes. I think that the large majori-ty of Greek people have long and wholeheartedly accepted that the euro is their home currency and will remain so.

Kamaris, HSBC: I agree. Ever since the inception of the single European currency, all opinion polls have shown that Greeks are heavily in favour of the euro. The percent-age of people who want Greece to remain in the euro has declined slightly, but the vast majority of Greeks still sup-port Greek membership of the euro.

If at any stage the Greek people decide that a return to the drachma will solve all the country’s economic prob-lems, then a discussion about a Grexit may begin again.

Exarchos, Deutsche: I think the Greeks recognise now that worse things could happen if Greece were to start toying with Grexit. They now look at the Cyprus inci-dent, where the country’s membership was jeopardised by a massive bank bail-in, and how their euro member-ship helped the country to climb out of their crisis more quickly than it would have done if it had had to undergo a massive debt restructuring. Or look at what happened in Argentina.

Dinos Kamaris HSBC

PDMA Roundtable


Papadopoulos, PDMA: And remember that Argentina had a debt to GDP ratio of just 46%.

Karamouzis, HSBC: Leaving aside what we may think about the likelihood of a Grexit, the market is very good at finding its own equilibrium. Something north of €13bn has flowed into a combination of the country’s debt, equity and private equity markets from foreign investors this year alone.

: And of course total demand for the Greek debt and equity issues we’ve seen in the last few months has been much more than this.

Karamouzis, HSBC: Exactly. In the context of an econ-omy worth about €170bn, this is a staggering amount. I very much doubt that these investors would have been prepared to put this money into a country that has any possibility of returning to the drachma.

Papadopoulos, PDMA: Your question about a Grexit was a little general. It’s important to specify from whose per-spective such a theoretical development is being assessed. Is Grexit desirable for Europe? Is it desirable for Greece? Are there any circumstances under which we would ask to exit the euro, or under which the EU would ask us to exit? Would investors ever like to see us exit the euro? So there are multiple ways of looking at this question.

: Just going back to the PDMA’s €3bn issue in April, you mentioned that it was taken up by a very diverse range of accounts. Clearly the distribu-tion was very well diversified from a geographical point of view, with 47% placed in the UK, 31% in continental Europe, 7% in Greece and 15% in the rest of the world. But it was notable that about a third of the deal went to hedge funds. Given that the book was so big, why was so much placed with hedge funds? Isn’t Greece trying to reduce the involvement of hedge funds in its capital market and attract more real money accounts?

Papadopoulos, PDMA: We have reduced the participa-tion of hedge funds considerably over the last few years.As I explained earlier, our fundamental objective is to build a liquid yield curve. You can’t ignore the fact that about 50% of the holders of the strip are hedge funds. So if you really want to encourage intra-curve trading, to promote the homogeneity of the curve and create a situ-ation which allows real money accounts to come into the strip, it is clear that you need to have the participation of

the hedge funds. Whether the right percentage of allocation of the April

issue to hedge funds would have been 30%, 20%, 15% or another number is something one can debate. I don’t know who’s going to be the judge of that. The alloca-tion process was co-ordinated by the lead managers and PDMA, and I personally think we made the right choice in placing about a third of the issue with hedge funds.

Excluding the hedge funds from the issue would have been a mistake. People underestimate the value of hedge funds. They are important liquidity providers and we need liquidity to build a curve and ultimately reduce our fund-ing costs. If we had placed 100% of the issue with long-only investors, guess what? There would not have been a single trade in the secondary market.

Kamaris, HSBC: This is definitely true. Demand was such that 100% could have been placed with real money accounts. But the tradability of the deal was greatly enhanced by the participation of the hedge funds.

Papadopoulos, PDMA: Hedge funds aren’t necessarily anathema. On the contrary. They are a vital part of the financial ecosystem as they provide liquidity.

: And have you seen the sort of diverse demand and liquidity in the secondary market that the allocation aimed to encourage?

Karamouzis, HSBC: The flows that we have seen suggest that the secondary market is healthy and diverse. We’ve seen everything from hedge funds to retail investors want-ing to hold part of the bond.

Kamaris, HSBC: If I’m not mistaken, there is more trading in the five year benchmark on a daily basis than there was in the combined 20 or so bonds that we had as a result of the PSI.

Karamouzis, HSBC: That is especially important given that the Greek banks are still unable to trade Greek gov-ernment bonds as actively as they used to do. A big part of the daily liquidity in any government bond market is provided by the local banks, but we don’t yet have this in Greece. We hope that this will change in the future.

: This anticipates my next question. We’ve looked at the five year issue largely through an inter-national investor’s lens, but how important to the PDMA is the domestic investor base?

Papadopoulos, PDMA: We expect the domestic banks to play an increasingly important role in this market. We need to develop further refinancing tools such as the repo market. In fact, I was positively surprised that within a week of the issue a fairly liquid repo market was established without the Greek banks’ direct involvement. We will continue to promote further the development of a repo market and we look forward to the Greek banks’ higher participation in this respect.

Karamouzis, HSBC: As I mentioned earlier, the local investor base is vital to any government bond market. Following PSI, the banks have been sidelined, but as normality returns to the Greek market, we expect them to become active again.

Additionally, local asset managers, private banks and retail investors are all becoming more active in the GGB market. Asset managers are building on the high returns achieved last year, on the back of the sizeable tightening in


PDMA Roundtable


GGB yields. Private banks and retail are buying GGBs and Greek bonds in general, seeking higher yields than what local bank deposits may offer. Interest on bank deposits has dropped from between 4% and 4.5% two years ago to a low 2.5% on average today. This decrease in deposit rates has incentivised local investors to look to the bond markets for yield.

: Looking to the likely evolution of the PDMA’s investor base going forward, presumably a rating upgrade would be enormously helpful in bringing in a wider range of accounts?

Papadopoulos, PDMA: Having visited many investors in recent months it is absolutely true that there are a number of institutions — insurance companies, for example — which are largely dependent on the ratings, because their internal statutes dictate that they are unable to propose to their investment committee and propose buying any-thing that is below BBB. They may be able to go down to double-B, but very seldom will they go below that.

Yes, a positive rating action would be helpful, but the agencies need to take into account various parameters. These include not just macroeconomic developments and indicators, but also a number of technical aspects which relate to the OSI [official sector involvement] and with the specific form that the OSI will take. An OSI haircut, for example, could likely have some impact on ratings deci-sions. So I think the ratings agencies will remain cautious as they weigh up the likely impact of any OSI.

: What are the bankers around the table expecting in terms of OSI — presumably not a haircut but an extension of maturities and a reduction in interest rates?

Kamaris, HSBC: Yes. This is what seems to be on the table right now.

Exarchos, Deutsche: It would certainly make sense for Greece to ask Europe to extend and improve the terms of the ODI. And it would make sense for Europe to agree to this as a pat on the back for the good work Greece has done.

Papadopoulos, PDMA: Whenever this discussion comes up, at least one person asks me whether or not there will be a haircut. It’s not that simple. You can’t compare a hair-cut of €10bn with a haircut of €200bn. A haircut is mean-ingless if it is solely dictated by the debt to GDP ratio.

When you’re talking about an OSI, it is important to know in advance what your debt servicing costs are

going to be afterwards. For example, haircutting some of the debt and leaving, say, 80% in floating rate form could be problematic. Whatever you may gain on the haircut you may lose on interest rate moves. So when you’re evaluating different debt interventions, you need to be very attentive to the debt servicing impact of the remaining debt stock.

I’m not saying an official sector debt haircut would not be useful. On the contrary. But its benefit, if any, will depend on the level and form of the overall restructur-ing. For example, if your target is to move from a debt to GDP ratio of, say, 125.5% to 124% — in other words if you’re talking about a €3bn haircut — the potential con-sequences and risks might not be worthwhile. So instead of talking about a haircut versus a non-haircut scenario, we should aim to have a much more precise discussion about the size of a potential intervention, its form and its potential impact on the cost of debt servicing. As men-tioned before, not all forms of debt reduction are equally beneficial in terms of debt sustainability.

: What’s the next step in the PDMA’s debt management strategy? You’ve already indicated that you have no funding gap to address over the next 12 months. So will it all be about liability management, consolidating the yield curve and focusing on liquid-ity and defragmentation?

Papadopoulos, PDMA: Exactly. It will be about interven-tion in the curve in order to build up a functioning bond market. That by itself will have a huge impact on our debt servicing costs and on the refinancing of the whole economy.

Our five year issue has shown that our real problem was liquidity rather than credit, given that 80% of our debt is held by our European partners.

: Do you have concrete plans for any debt buybacks or other liability management exercises that you can share with us?

Papadopoulos, PDMA: We have considered some liabil-ity management ideas which as you’ll understand we’re not able to discuss at the moment.

I re-emphasise that the purpose of liability management for us is to build a more liquid curve. To a certain extent, our task is easier than Portugal’s or Ireland’s because we don’t have similar funding needs, and the funding costs of the ESM component of the debt are equivalent to those of a double-A plus borrower. In the case of the IMF com-ponent it is slightly less than 3.9%, which is roughly the

Stelios Papadopoulos PDMA


PDMA Roundtable


same as 4.75% swapped into floating. The bulk of our cost of funding is due to the ESM, and

is roughly 1.7%. This is very favourable and it is one more reason why our debt to GDP ratio is not as meaningful. Usually the stock of debt defines the cost of your debt servicing, if you consider your interest rate to be linked to your credit rating, which is not the case for Greece.

: Can any of the bankers around the table comment on what the market would like to see from the PDMA’s liability management programme?

Karamouzis, HSBC: The market likes liquidity, plain and simple. The more liquid points they have that they can trade against, the better. Any step that Stelios and the PDMA takes to provide liquidity to the market will defi-nitely be seen by investors as a positive move.

Kamaris, HSBC: The issuer and the markets are on the same side of the table. They want the same thing, which is more liquidity.

Exarchos, Deutsche: The liquidity created in the sov-ereign market will also be welcomed by the domestic borrowers. We’re seeing this very clearly in the market almost on a daily basis. For every step that the PDMA takes in terms of providing more data points along the curve, a few days later we see a corporate issuer or a bank coming into the market.

So the PDMA has really acted as the benchmark by creating a liquid curve which has played a central role in helping Greek borrowers to tap the bond and loans markets — which as we’ve heard was one of the main objectives of the five year bond issue.

Papadopoulos, PDMA: I’d like to add that people might assume that under the broad title of liability management there are all sorts of demons lurking like debt restructur-ing. But this is clearly not the case.

: We’ve just seen Portugal officially exit from its EU-IMF programme. When will Greece fol-low, and would this be regarded by the market as positive?

Papadopoulos, PDMA: That’s a political decision. My job is to provide solutions to the government whenever it decides to exit the programme. We would be ready if this happened tomorrow or in a year’s time.

: Another political decision, I guess, is how the legal status of the PDMA is likely to evolve.

Would you like or expect it to become independent at some stage in the future?

Papadopoulos, PDMA: The easiest answer would be for me to say that we really want to be independent. But to be totally frank, DMOs in Europe come in various forms, and each administration has very different characteristics. You can’t compare the administration in France, for example, with those in Greece, Portugal or Ireland. Each has a com-pletely different structure, purpose and orientation.

Having said that, the most important goal for a DMO is to be efficient rather than independent. In order for a DMO to be efficient, liquidity and liability management need to be integrated rather than disbursed into several different entities within the central government.

So I believe the legal structure of a DMO is not that important. You can continue to perform your role as a government entity, provided that you have the necessary autonomy on the one hand, and that the tasks you per-form are integrated on the other.

Exarchos, Deutsche: It’s not surprising that despite all the changes imposed by the troika, it left the PDMA total-ly intact. That says a lot about the PDMA’s independence and remoteness from political intervention. I applaud the troika’s vote of confidence in the PDMA.

Papadopoulos, PDMA: More work needs to be done on the functions and the organisation of the PDMA than on its independence. The French DMO acts as a Direction Generale of France’s Ministry of Finance; and to my knowledge so does the Italian DMO. The integration and the complementarity of the functions that are exercised within their organisations are such that they don’t need “independence” in the way you put it. They are already de facto independent.

Kamaris, HSBC: I would add that the PDMA is one of the best functioning public entities in Greece, if not the best. I think it is positive that some of the functions that were previously undertaken by the National Accounting Office have gone to the PDMA, which will further increase the efficiency of the PDMA.

Papadopoulos, PDMA: It’s difficult to compare the PDMA today with that of previous years. Right now, any kind of operational risk needs to be minimised as much as possible. This is why I repeat that our most important priority must be to provide assurances that there is a con-tinuity in the functions of the PDMA tying together debt management and liquidity.

Ireland and Portugal both provided us with a valuable benchmark in the sense that there has been an effort by the relevant DMOs to manage not only their debt but also their liquidity. This pool management is important where you have to deal with potential discrepancies, mistakes and delays.

A lot of DMOs aren’t independent, but because of the fact that they are efficient and to a large extent the func-tions are integrated within them, the model works well.

: We’ve discussed a number of topics in this roundtable. Stelios, how would you sum up the PDMA’s message to investors today?

Papadopoulos, PDMA: There is a lot of room for prog-ress and growth in Greece. I think investors need to focus on this potential, and rather than look at our debt to GDP ratio they should look at our debt servicing costs as a pro-portion of GDP. s

Dinos Kamaris HSBC


Banking Sector Roundtable

: Are Greek banks confident that the worst is over for the economy? If so, is this being reflected in rising deposits and a recovery in demand for credit?

Ilias Lekkos, Piraeus Bank: To put the story of the Greek economy into perspective, since the trough of the cycle, which was two years ago, we have seen a continuous trend of slowing recession. We’ve gone from GDP growth of minus 7.5% in the middle of 2012 to minus 2.3% in the fourth quarter and to minus 1.1% for the first quarter of 2014.

I think a combination of two factors has led to this recovery. The first has been the renewed commitment of the Greek government to the implementation of the IMF-EU adjustment programme. Although this has been very important, it is something that some foreign analysts were quite slow to recognise.

The second has been that on the back of this commit-ment, and on the back of the strong fiscal results that the government has delivered, the troika in general but

especially the EU has decided to direct substantial funding towards the Greek economy. A big part of the recovery that we’ve been witnessing since the second half of 2013 has come on the back of EU funding. For example, in December the EU disbursed close to €3bn to the Greek government to support the restarting of several large infra-structure projects.

Also, the Ministry of Employment is introducing sev-eral new programmes to support job creation and set up vocational schemes for the long term unemployed. This will further support the growth momentum we’re begin-ning to see.

Following the bank recapitalisation exercise that has just been completed, we will hopefully see this improvement in sentiment and increase in economic activity being given more assistance by the banking sector.

: Is this improving sentiment leading to any increase in demand for credit from the Greek corporate sector?

Participants in the roundtable were:

Tom Arvanitis, general manager, treasury and financial markets, Piraeus Bank, Athens

Nicholas Exarchos, managing director, head of Greece and Cyprus, Deutsche Bank, London

Paula Hadjisotiriou, group chief financial officer, National Bank of Greece (NBG), Athens

Dinos Kamaris, head of global markets and capital financing, Greece, HSBC, Athens

Vassilis Karamouzis, head of global markets sales, Greece/Cyprus, HSBC, Athens

Fokion Karavias, head of capital markets and wealth management, Eurobank, Athens

Georgios Michalopoulos, senior manager, financial markets division, Alpha Bank, Athens

Ilias Lekkos, chief economist, Piraeus Bank, Athens

Platon Monokroussos, assistant general manager, chief market economist, Eurobank, Athens

Greg Papagrigoris, head of investor relations, National Bank of Greece (NBG), Athens

Phil Moore, moderator, GlobalCapital

Positive momentum returns to Greece’s recalibrated banks

Greece’s four major banks have returned to the international capital market en masse over the last year, completing a series of highly successful equity and debt issues regarded by many market participants as a barometer of Greece’s economic recovery. More immediately, these issues have addressed the issue of capital shortfalls in the Greek banking sector, which should give the leading banks scope to support the longer term rehabilitation of the economy by providing credit to the corporate sector.Nobody is under any illusion, however, about the challenges still facing the Greek banks. To discuss the opportunities that lie ahead as the economic recovery gathers momentum, and the challenges arising from weak asset quality and an uncertain outlook for a return to profitability, the four industry leaders gathered at the GlobalCapital Greek banks roundtable.



Platon Monokroussos, Eurobank: Over the last year deposit rates have been coming down from their peak of between 4% and 5%. This is very important, because to the extent that this slow improvement in the monetary policy transmission mechanism translates into a gradual reduction in loan rates, this could provide a boost to the economy.

We implemented an empirical study a year ago which shows that for every one percentage point decrease in loan rates, real GDP increases by 0.3% on a cumulative basis over a four quarter period. The question here is whether this gradual improvement can facilitate a recovery in loan growth, which is likely to happen from 2015 onwards.

Credit growth is still negative in Greece, at minus 4% to minus 5%. The question is whether the improvement we’ve seen in deposit rates will continue in the period ahead. My view is that deposit rates will continue to normalise.

Based on the Nowcasting model we have developed to estimate GDP growth on a real time basis, I fully agree that this recovery is becoming more broadly based. The pace of annual real GDP contraction has slowed to minus 1.1% in the first quarter of 2014 from minus 2.3% in the prior quarter and minus 6% in the first quarter of 2013, and we expect it to switch into positive territory on from Q3 2014 onwards. So we see increasingly convincing signs of a recovery in the economy.

Paula Hadjisotiriou, NBG: I think you can split the Greek economy and credit cycle into two parts. One is made up of specific sectors where you have a small number of players, all of which are in trouble, and which need major restruc-turing. That is currently taking place. But there will need to be more restructuring before we see any credit growth in those sectors.

In all the other sectors, there are a growing number of specific industry players which are looking to invest. We’ve seen real credit demand from those sectors.

Now that the possibility of Greece leaving the euro is no longer part of the equation, people are starting to believe that they should be investing. We have seasoned entrepre-neurs who are coming to us with projects that need our funding alongside their investment. We are now consider-ing, and in some cases approving, those projects and some money has already been drawn down in the case of healthy credit proposals. Some are larger and some are smaller but there are a growing number of the larger ones.

As sentiment improves, we are seeing larger companies becoming increasingly confident about their prospects. Their financials are generally in better shape because they have managed to reduce their wage bill significantly both by reducing salaries and the number of people they employ.

So the larger companies are leading the way and taking on new projects. The medium sized companies are follow-ing and the smaller ones will follow suit later.

We think consumer demand will be the last thing to pick up. We will need to see employment levels rising strongly before people start to feel comfortable enough to take on more credit. So we have very little new demand for con-sumer credit, and the repayments of household loans are so regular and so large that there will be continued deleverag-ing of personal debt.

Monokroussos, Eurobank: On the question of employ-ment, the balance between new hires and lay-offs has been positive over the last nine months, and unemployment is now on a declining path. From a record high of 27.7% reached last September, the jobless rate eased to 26.5% in February 2014. I think we will see a further decline this year, towards 25.5%, which means that the cyclical peak in the unemployment rate has already been passed. This is clearly positive news for loan growth going forward.

Greg Papagrigoris, NBG: Also, we must not forget that the Greek crisis did not begin as a banking crisis. It started off as a sovereign crisis with huge spill-over costs for domestic banks and corporates. Initially, the main transmis-sion mechanism for banks was the PSI where huge losses were taken against the equity and capital bases.

Subsequently the economic recession had ripple effects on credit quality as evidenced in the credit losses suffered by the banks’ loan portfolios, especially during mid-2011 to mid-2012 where formation of 90dpd [days past due] loans peaked.

At the same time, through the crisis, corporate leverage ratios remained low in absolute terms and especially rela-tive to the rest of developed Europe. Also, Greek compa-nies managed to contain their cost bases, adjusting to the new economic reality suggested by the crisis. We have seen costs reduced by 25%-35% so far.

Currently, with the first signs of recovery visible, demand for credit is gradually picking up. The question is whether the banks are becoming more able to accommodate this demand through improving their liquidity profiles.

We have recently seen a couple of banks, NBG included, regaining funding access in the senior unsecured space. We expect to see repeat issues for larger amounts as well as further issues coming from the other banks. So, with the gradual improvement in the sector’s access to funding, as well as the envisaged reduction in the cost of that funding, banks will increasingly be in a better position to accommo-date rising demand for credit.

: The key dynamic here, as it is through-

Platon Monokroussos EUROBANK

Greg Papagrigoris NBG



out Europe, is finding a balance between supporting economic growth and addressing the issue of non-performing loans (NPLs), which Moody’s expects to reach something like 37% of gross loans by the end of 2014. How do banks stabilise NPLs on the one hand, and support the economy on the other?

Georgios Michalopoulos, Alpha Bank: As previously discussed, a number of cyclical economic indicators have already reached their peak. This is certainly encouraging the banks to increase their lending appetite. A second important point is that banks had fewer tools available to actively manage or restructure their loan portfolios during the crisis. Now things are changing on the macro side as well as on the regulatory front, allowing banks to explore options to address the problem. We expect this to strengthen the positive momentum in the Greek banks’ handling of their NPLs.

At the same time, there are a number of sectors that are gradually picking up in terms of demand and growth, which is also helping us to reduce the burden of NPLs.

Headway is also being made in helping banks to pursue new strategies on the NPL side. Today, there is more two way traffic between the banks and borrowers in terms of exploring solutions to the NPL issue.

In the coming months of 2014 and in 2015, we expect this to become more of a standardised process which will help the banks tackle a big part of their NPLs. Up to now banks have focused mainly on the formation of NPLs rather than on the stock. Now we have much more scope for dealing with the stock.

Hadjisotiriou, NBG: The big difference today is that all the banks have set up separate divisions dealing with credit growth and problem loans. This separation and focus will help the banks to be more productive in disbursing loans, and to be more efficient in managing NPLs.

I agree that changes in legislation have helped. Changes still to come will also help. We’re expecting that by the end of September as per the obligations that have already been included in the revised MEFP [Memorandum of Economic and Financial Policies], there will be new bank-ruptcy laws, both for companies and for individuals. That will be very important because it will remove some of the incorrect rigidities in the current credit environment and improve the balance in the relationship between lenders and borrowers. As George said, this will change the way we approach customers and the way customers approach us, which will have a big positive effect on NPLs.

: To what extent is the capital market help-ing to supply funding to corporates if the banks are

either unwilling to lend or unable to provide longer term funding?

Nicholas Exarchos, Deutsche: I think it’s very healthy that the Greek corporates are also tapping the international markets as this brings in fresh capital, and to a large extent provides badly needed liquidity to the Greek banking system.

Dinos Kamaris, HSBC: I agree that in some parts of the corporate space there is clearly rising appetite for credit. Last year, debt capital markets began to step in to pro-vide liquidity that the banks were unable to offer. In the last two or three months this process has accelerated as appetite in the global DCM scene has increased to finance corporates and banks as well as sovereigns.

In Greece, there has been interplay between all of these borrowers. I think this interplay will continue, giving Greece Inc access to markets at more normal pricing levels.

: In other words, there is a symbiotic rela-tionship between issuance by the PDMA and the banks. Moving on to the banks’ issuance in the senior unsecured market, NBG’s recent issue was notable for its pricing through the government’s benchmark. What was the background to that transaction? Was the aim always to build on the success of the PDMA’s deal in early April?

Papagrigoris, NBG: The €750m senior unsecured issue coincided with the beginning of our equity offering road-show to raise €2.5bn of equity capital.

In our discussions with debt investors, we highlighted the strengths of our franchise both in Greece and interna-tionally, and the performance within the key aspects of the business, such as asset quality, liquidity and profitability. We also addressed investors’ queries regarding the bank’s capital position for the next few years, demonstrating the capacity of NBG to address conclusively the challenges on the capital side.

Ticking the boxes on all four basic aspects of the bank’s business has been very important to equity and debt inves-tors alike. The successful outcome on both the equity and the debt sides is a testament to the trust of investors in our business model.

: Tom, just staying with the fixed income market before we move on to the equity side, Piraeus was the first of the Greek banks to tap the interna-tional market post-crisis, wasn’t it?

Tom Arvanitis, Piraeus Bank: That’s true. That was a reflection of the fact that at the time Piraeus was probably the most outward looking of the Greek banks in terms of engaging in dialogue with overseas equity investors given their large participation in our first recap.

So we already had a communication channel open with the international investor community — probably more so than other banks at the time.

Additionally, given the strength of our liquidity posi-tion, we were probably best placed to address the interna-tional market and convey the message that we were back in the market. Because of our strong liquidity, demonstrat-ing that we had regained access to the market was more important than the funding exercise.

One of the difficult objectives we set out to achieve was to bring down pricing from levels that had a 6% or even a 7% handle to the 5% area, and keep the investor base engaged at the same time. So to answer your question, yes, this was the opening transaction for the Greek banks

Georgios Michalopoulos ALPHA BANK



and we think it set a pricing reference for the other issuers.

Kamaris, HSBC: Let’s not forget that for three years or so Greek borrowers were completely out of the market, and that goes for the sovereign, the banks and the corporates. You can’t expect a market that has been absent for that length of time to achieve the correct pricing on day one.

This is a market in transition. In 2013 corporates regained access before banks. Financials and the sover-eign were then able to access the market at lower prices. I wouldn’t read too much into the pricing differences between NBG and the sovereign, for example, because this is still a market in transition.

Vassilis Karamouzis, HSBC: I think that individually, as well as collectively, we have seen the corporates, the banks and the sovereign all selling the story of Greece to inter-national investors. The fact that the corporates were able to come first might not make sense in any other economy, but that was what happened here.

The story of Greece was the first thing investors asked about, and it was only afterwards that they focused on the individual issuer. I don’t think it was a question of any bor-rower trying to get to the market ahead of the sovereign, or vice versa. Everybody collectively was telling more or less the same story, which created tremendous momen-tum. This is why we are now seeing so many Greek issuers having such good access to the markets, both in debt and equity.

Papagrigoris, NBG: The offerings we saw first from Piraeus Bank, and subsequently from the sovereign and NBG, acted synergistically rather than competitively as they both acted to boost international confidence in the Greek economy and in the banking system.

: Let’s move on to the equity capital rais-ings we’ve seen from the banks. Under the baseline scenario, it was estimated that Greek banks had a cap-ital shortfall of about €6.4bn. Yet in the recent round of equity issues, the banks raised almost as much as they were estimated to need under the adverse sce-nario. So it is fair to say that the capital raising is now more or less complete?

Exarchos, Deutsche: Yes, it is very fair to say so. The mes-sage is that the banks erred on the conservative side and raised more capital than was needed under the adverse scenario. This gave them a big enough buffer to ensure that they won’t have to come back to the markets in the foreseeable future.

Fokion Karavias, Eurobank: Before answering that ques-tion I’d just like to make a comment about the liquidity of the banks.

I think it’s important to mention that in terms of loan to deposit ratio, Greek banks have improved a great deal in the last few months. Unfortunately, this has mainly been driven by the deleveraging that we’ve seen on the asset side of the balance sheet. It is a cause for concern that we did not see deposits coming back into the system during the course of 2013. In the first few months of 2014 deposit balances have been more or less stable. After the second round of bank recapitalisations, and following the European elections, we expect to see some improvement in terms of deposits.

: What is the average loan to deposit ratio among the Greek banks today?

Karavias, Eurobank: The lowest is NBG, which is below 100%. The others are slightly above 100%, with Eurobank having the second lowest in the Greek market at 110%. So overall the ratio is at a manageable level compared to the European average.

Although we have not seen much improvement in terms of deposit balances, we have seen a very significant effect in the cost of deposits. During the course of 2013 there was a very notable decline in the cost of time deposit costs, in line with what we have seen in treasury bill and bond yields, and this trend has been continued in the first part of 2014. This is very important not only for the prof-itability of the banks but also for their ability to provide cheaper financing to the corporate sector.

We have to realise that there is still significant market segmentation in the eurozone. Funding costs for corpo-rates in northern Europe are in the 2%-3% range, whereas in the south, where Greece is the extreme case, they bor-row at 5%, 6%, 7% or even higher. So unless this imbal-ance is addressed somehow — and we know European authorities are working in this direction — this may be a threat to the future economic stability of the eurozone.

Coming back to your question about capital, the require-ment of the Bank of Greece was for banks to cover the shortfall under a base scenario, which is in line with what the EBA is going to request for other European banks under its stress tests.

Some banks also decided to repay preference shares in an effort to reduce state aid, which was a step in the right direction. Some others also decided to cover the require-ment for an adverse scenario. Overall, the perception that exists in the market, which was confirmed by investors’ response to all four capital increases, is that Greek banks came out of this exercise largely over capitalised.

For instance, Eurobank shows a pre-forma core tier one ratio of 19% post the capital increase of €2.9bn. It appears that the investor community is convinced that the banks have enough capital buffers to cope with their NPLs and we expect this to be confirmed as well by the European stress tests which are underway.

Hadjisotiriou, NBG: I would echo what Vassilis said, which is that the main story is what Greece is doing. When we were roadshowing our capital increase we found that although investors were engaged, they weren’t as knowl-edgeable about the Greek story as they should have been, which meant that we needed to do a lot of educational work. I’m sure my colleagues around the table had to go through the same educational process on their roadshows, to explain that things are improving and we have passed the trough. We’re not out of the woods, but we are mov-ing in the right direction and gathering pace.




So we needed to talk to investors about Greece first, and then focus on what NBG has to offer in terms of its com-petitive advantages and how we see profitability develop-ing over the next few years. The key elements are liquidity and asset quality.

The drivers of profitability in the Greek banking sec-tor were not quite clear in everybody’s mind, so we needed to explain that one major change is the fact that the cost of funding has been coming down from very high levels. We’re also seeing a change in the balance of our revenue, which is very significant. Previously all Greek banks earned a lot of their income from deposits. Although the cost of deposits is coming down, it is still high, and today we have much better asset spreads to compensate for this.

In the past we used to lend to corporates at very low spreads. We have learned that lesson, and we are now making more on our assets and paying less on our liabili-ties.

A positive differentiating element for NBG is that we also own a bank in Turkey, which gives us a more bal-anced portfolio in the sense that weakness in one market can be offset by strength in another. But the basic issue is that Greece is coming out of the crisis: that above all else is the key to the success we’ve had in both the debt and the equity markets.

: Presumably your recent equity issue has also brought your capital up to a level you’re comfort-able with?

Hadjisotiriou, NBG: Yes. At this point on the basis of the full Basel III look-through, we are at 11.7%, which is above the average European level. Greek banks will have to remain above the European average, which is around 10%, but at 11.7% we are probably over-capitalised, especially as I don’t believe we will see anything as catastrophic as the predictions in the adverse stress tests. Having missed the targets in the first BlackRock stress tests, which were a bit premature on the Greek recovery, central banks have gone to the other extreme of being over-conservative to ensure they don’t repeat the same mistake.

So we regard our capital position now as being very strong, and we don’t think unexpected losses in the future will arise because everything has been analysed and dou-ble-analysed. There is plenty of upside to come in terms of profitability.

: So you don’t believe there is anything to fear from the forthcoming Asset Quality Review (AQR)?

Hadjisotiriou, NBG: No. I don’t think the AQR will tell us anything materially different about the Greek banks we don’t already know. If anything the AQR should confirm the strength of the Greek banks.

Lekkos, Piraeus Bank: I agree. For better or worse, the balance sheets of Greek banks are very simple these days. Unlike some other European banks, we have no securi-tized bonds or complex derivatives on our balance sheets.

: Paula made a very interesting point when she said that international investors weren’t knowledgeable enough about Greece. Did other issu-ers have the same impression when they were road-showing? If so, was this because they hadn’t updated their homework, or because they were new investors who had not previously had any reason to analyse Greek fundamentals?

Karavias, Eurobank: I think investors have become very well educated about the Greek market and the Greek banks over the last few months. As banks, we played an important role in this education process because we have all been on a number of so-called non-deal roadshows since mid-2013. At Eurobank, since the summer of 2013 we have had numerous meetings with investors in the US and Canada, Europe, the Middle East and Asia.

What we have to keep in mind is that we are attract-ing a number of different classes of investors. Some of them, including the hedge funds and the more speculative accounts, are quite a long way ahead on the learning curve. We’re seeing now growing involvement on the part of more traditional accounts, or the so-called long-only inves-tors. Some of them are taking more time to familiarise themselves with the Greek economy, as well as the banks and corporates.

In the recent capital increases we have seen some inves-tors buying into Greece for the first time, which is a reflec-tion of this shift from hedge funds to long-only accounts. I think all these investors will continue to monitor develop-ments in the Greek economy very closely. I believe the international press is helping in this respect by keeping Greece under the spotlight.

Arvanitis, Piraeus Bank: One of the positive side effects of the crisis was that investors had to follow what was happening in Greece even if they weren’t actively trading in the market. There were guys trading pork bellies in Chicago who had to keep an eye on what was happening in Greece, because speculation about a Grexit and so on was affecting markets throughout the world. So there are many more investors who have a brand awareness about

Paula Hadjisotiriou NBG

Ilias Lekkos PIRAEUS BANK



Greece than there were before the crisis.

: But was the international coverage of what was happening in Greece helpful or unhelpful? Much of it focused on some of the more lurid details of the crisis rather than on the macroeconomic picture.

Arvanitis, Piraeus Bank: But it has put Greece on people’s radar screens. It has meant that the number of people who have a view on Greece these days is impressive. They need more information and knowhow, but as this positive momentum builds up, I see more investors coming into Greece.

Monokroussos, Eurobank: Initially, the coverage was definitely negative, and there was probably some exag-geration. But, since the elections in mid-2012, there has been an improvement in a number of macroeconomic indicators which has encouraged the coverage of Greece to become more positive. Of course, in recent months, there have been many more reports in the international media focusing on the Greek recovery story and the successful adjustment that is being made.

Papagrigoris, NBG: We need to identify a problem with the transmission mechanism here. We communicate with investors via multiple channels including roadshows, but analysts still play a very important role in the education process. Many of them were badly burned in the down-turn, as they failed to identify it, and are now cautious about the Greek recovery story. Some are still waiting for more solid signs of a recovery both on the economic side and in the corporate sector before they start actively cover-ing Greece and the banks, while others are becoming more prepared to recommend investors to buy into the Greek recovery story.

Hadjisotiriou, NBG: I agree that it’s important to get the long-only investors more involved in Greece. We don’t want players; we want investors. And this education pro-cess is playing a key role in that respect. It will take time for them to absorb all the necessary information. But once they decide to invest, we are hopeful that they will stay in the market for the long term, supporting Greece in general and the banks in particular.

: Perhaps we could look in a little more depth at how the investor base has changed. Alpha Bank was the first to access the international equity market this time last year, with its €550m capital increase. George, how does the investor base today compare with the accounts that took up that deal?

Michalopoulos, Alpha Bank: That’s right. Alpha Bank was the first Greek bank to come out with a rights issue last year, and following its successful completion all other systemic Greek banks have followed. Back then, some people saw our deal as a bit of a miracle because very few believed that the Greek banks would be able to raise money from international markets at the speed and in the magnitude that we did.

In terms of how the investor base has changed, it was definitely the speculative buyers that were the first to put Greece back into their portfolios. This year, in the second phase of this process, we have been operating in a much more favourable environment, with investors recognising that bad news is the exception rather than the rule.

This is why we now see a better mix of speculative investors and long-only accounts. The next step in the process will be a more permanent shift towards long-only investors who follow Greece on a continuous basis. Believe it or not, there are plenty of long-only, buy and hold investors who have not yet put a single penny into Greece since the crisis. That means there is potentially still a lot of new money that will flow into Greece.

These investors, many of whom had their fingers burned in a number of markets during the crisis, are wait-ing for more signs of stability. They also need time to have their investment decisions approved internally. But when these investors come, they will stay.

: To what extent is that a function of Greece’s credit rating?

Michalopoulos, Alpha Bank: Whether we like it or not, the ratings are still a very important factor. The agencies are already reflecting the positive momentum in their reports, but there are still a lot of ifs and buts that scare investors. We believe that these concerns will gradually recede and that investors will restore their exposure to Greece to the same sort of size they had in the past.

We also believe that in 2014, probably towards the end of the year, we will have some good news from some of the ratings agencies. They are recognising that things are changing, and that Greece’s credit ratings are probably not in accordance with the improvements that have already happened.

: From the perspective of an equity inves-tor, where does Greece stand as an asset class? On the one hand it’s in the MSCI Emerging Markets Index. On the other, now that a break-up of the single European currency is off the agenda, some investors regard it as an important component of the euro club. Does this status as a so called advanced emerging market mean that Greece is able to attract cross-over investors, as well as dedicated emerging and developed market accounts?

Arvanitis, Piraeus Bank: I wouldn’t attach too much importance to whether Greece is classified as an emerging or a developed market. The key priority is to talk to the end investors and make them aware of the Greek story. We’re in investors’ sweet spot because we have a good story to tell, not because we are classified as an advanced emerging market or whatever. A lot of people who were brave enough to come into the market a year ago have made a fortune by focusing on that story.

Karamouzis, HSBC: I agree. For investors who believe the euro is not going to break up, Greece offers a unique asset class, with emerging market yields in a strong currency. There is nowhere else in the world you can find this and

Tom Arvanitis PIRAEUS BANK



straightaway attracts buyers from all corners of the invest-ment community.

As Tom said, we have seen a new wave of investors coming into this market. But we have also seen traditional European investors from five or six years ago re-engaging in the market.

Kamaris, HSBC: I think the timing of Greece’s reclas-sification as an emerging market was beneficial, because it meant that it became a bigger fish in a smaller pond. Emerging markets as an asset class have lost some of the popularity they enjoyed in previous years, so a lot of big emerging market investors have found it difficult to gener-ate good performance.

Unlike some emerging markets, Greece has put most of its problems behind it, and as Vassilis said, all our securi-ties are denominated in euros, and with Grexit out of the

picture this is a major selling point for Greece.Also, for many emerging market countries and com-

panies, we still don’t know what skeletons may be in the cupboard. In the case of Greece, the worst stories are already out.

: Just coming back to the point about Greece’s inclusion in the MSCI Emerging Markets benchmark, isn’t this positive because it means a lot of index buyers have to come into the market?

Arvanitis, Piraeus Bank: It does create some passive demand, but I don’t think it makes a big difference among major funds.

Lekkos, Piraeus Bank: By and large, the most difficult

issues to sell were the earlier capital increases because they marketed on the basis of the forthcoming improvements in the economy. This time round it was easier to convince investors about the recovery.

: On your roadshows, do investors still ask about the Greek banks’ dependence on ECB and ELA facilities? According to Moody’s these fell from 35% of total assets at the end of 2012 to 19% in December 2013, so the trend there is clearly positive.

Papagrigoris, NBG: Absolutely. It has been important for us to be able to reassure investors about our liquidity position. We need to be able to persuade investors that we enjoy strong drivers of NII [net interest income] growth, and that we can sustain or even enhance NIM [net interest margins]. Clearly, a key driver in this process is the capac-ity of the Greek banks to lever up, supporting domestic credit expansion.

The credit expansion we expect to see in the second half of 2014 and over the medium term will be of a different kind to what we saw in the previous decade. Retail lend-ing will keep showing signs of delivering and stabilisation, while the corporate book will start growing, as we have already discussed. Spreads on the banks’ corporate books are very different to those on their retail books, so there is a mix effect to be factored in.

In the case of NBG, which is a very big player in the mortgage market, our book is still being de-levered as there is little new production if any at all, a theme that applies to the sector as well. The spread on that book is about 260bp. At the same time we are leveraging up on the corporate side, with a new production spread rang-ing from 450bp to 700bp, depending on the size of the company. As such, there is a substitution effect supporting NIM expansion given a spread differential of more than 200bp.

All this means that our strong liquidity position will be very important going forward, as it will allow for substan-tial amounts of liquidity to be channelled into high margin business.

: Do other banks detect or expect a switch of emphasis away from balance sheet repair and towards a focus on P&L?

Karavias, Eurobank: It is clear that compared with six months ago, there has been a significant shift in our dis-cussions with investors, away from asset quality and into the evolution of P&L and the generation of pre-provision income, net interest margins and fee and commission income going forward.

Increasingly, investors are asking how banks are going to return to the profitability levels that are compatible with a full macro normalisation.

Obviously, asset quality remains a very important ele-ment for investors. But there, investor attention has been shifting more towards how banks can maximise the ben-efits of NPL management rather than on identifying the NPL peak.

Lekkos, Piraeus Bank: One point that several of my colleagues have alluded to is the fact that the private sec-tor in Greece is not over-leveraged. In fact, by European standards it is under levered. In Portugal, for example, the private sector is much more heavily levered than it is in Greece. This will create opportunities for the Greek economy and for Greek banks.

: How much room is there for generating


Dinos Kamaris HSBC



more efficiencies and revenue via initiatives such as cost cutting and asset sales?

Karavias, Eurobank: This is an interesting area. As a bank that has been a recipient of state aid — like all Greek banks — we have made a number of commitments to the European authorities including selling non-core assets, such as our insurance business in Greece, and reducing our presence overseas.

Another area of focus is related to NPL management, and the potential sale by the banks of portfolios of NPLs to international players in line with what has happened in Spain and to a certain extent in Italy. This is an area where we have seen very strong interest from investors. So far there have only been a very small number of transactions completed largely by international banks that have decided to reduce their presence in Greece. I think we may see more transactions going forward, but this may be more of a discussion for 2015 than 2014.

: Which sorts of investors are showing interest in Greek NPLs?

Karavias, Eurobank: It is a number of specialised funds from the US and Europe that have NPL units and consider-able international experience. But for the time being we’re not seeing demand meeting supply at current price levels.

Michalopoulos, Alpha Bank: The initial interest we saw was purely from the speculative investor community. However, because of a lack of confidence in Greece’s pros-pects, this interest was reflected in demands for deeply discounted pricing. There was also a lot of information asymmetry in terms of the quality of the underlying assets, the profile of the borrower, the behaviour of the collateral and the outlook for regulation and legislation governing these assets.

Although I don’t think this is something that Greek banks will pursue aggressively, they will nevertheless explore the possibility of selling loan portfolios on an opportunistic basis. Obviously, the progress on NPLs and their coverage through elevated provisions provides a strong background for further discussions around asset disposals.

Arvanitis, Bank Piraeus: Then again, it has become clear that it’s difficult to manage the acquisition of loan portfo-lios if you don’t have a local banking licence. So I think the majority of investors will choose to participate as equity investors and pick up the upside there rather than trying to buy portfolios directly.

: What are NBG’s plans for selling core or non-core assets? Paula mentioned NBG’s Turkish operation. Presumably there is no question of offload-ing that as part of the Greek banks’ broader asset sales programme?

Papagrigoris, NBG: Well, as the economic recovery becomes more tangible, the bid/ask spread will continue to narrow. At the same time, changes in the legal frame-work regarding both corporates and households will create more opportunities.

On the non-core side, we will be doing a substantial amount of transactions in the future. This year we are aim-ing to generate about €1bn of capital benefit from such transactions and from managing our risk weighted assets. Then there will be additional sales over a larger time frame of two to four years which will be realised as windows of opportunity arise.

: What about Piraeus Bank? Are you sell-ing any core or non-core assets?

Arvanitis, Piraeus Bank: Not to the extent that some of the other banks are. The new Piraeus has been enlarged through the absorption of the sound part of the Agricultural Bank of Greece, including its Cypriot branches. Of course we have to reduce our exposure to the international space, but this won’t involve significant asset sales.

Michalopoulos, Alpha Bank: Indeed, we are rationalis-ing our presence in the Balkans to improve efficiency and capital ratios, but we are not necessarily divesting from the areas as a whole. Having a presence throughout southeast Europe was a priority for the Greek banks between 2005 and 2008, when they had exhausted the capacity of grow-ing in the domestic market. Now things have changed a lot and the core market is once again offering good growth opportunities.

So each bank will develop its strategy in southeast Europe based on where it sees potential. But none can afford to overstretch across the entire Balkan area or beyond.

Arvanitis, Piraeus Bank: Overall, the so-called KPIs [key performance indicators], RFAs [relationship framework agreements], or guidelines that have been given to us by the official sector are generally business friendly. They are probably the same that the banks would have agreed on if they had drawn them up themselves. Because there was recognition from the start that the cause of the crisis was the state, not the banks, we were not penalised by being instructed to achieve a huge deleveraging, or to reduce our balance sheet by 30%.

: Does this also apply to costs? Are the Greek banks under any pressure to further reduce cost to income ratios?

Arvanitis, Piraeus Bank: Yes. Cost reductions are part of the KPIs. We are being advised to bring costs down, but again, this is something we would have done anyway.

Michalopoulos, Alpha Bank: Bear in mind that the entire banking landscape has changed a lot, with four banks now commanding 90% of the market. On the one hand, this is creating the capacity for increased efficiencies, and definitely more cost cutting will follow throughout the industry. The benefits of this ongoing rationalisation will be fully phased into our results over the next couple of years. s

Fokion Karavias EUROBANK


BANKING SECTOR

IN SEPTEMBER 2012 the Greek government set up a working group to investigate how much the country could demand from Germany in unpaid reparations for the Se cond World War. Manolis Glezos, a socialist politician famous for climbing the Acropolis in 1941 and tearing down the Nazi occupiers’ swastika flag, said at 3% interest the debt stood at more than €1tr. Greece would “accept a haircut on the interest” he said. That was the moment the country’s financial troubles surpassed desperation and entered the realm of fantasy.

But just two years after its second bail-out — the largest sovereign debt restructuring in history — Greece is now trying to enter a completely new era, shunning the realm of fear and speculation for the much warmer climbs of confidence and even growth.

In the past year the country’s four

major banks have raised billions in equity capital from a steadily growing pool of international investors, and two of them have joined the Hellenic Republic itself in returning to the international bond markets.

“The economic recovery is no longer speculative, it is a fact,” says Hubert Vannier, head of financial institutions M&A at Deutsche Bank in London.

“Last year when we were raising capital for Greek banks, we were talking then about the economic recovery but as a prospect. But now Greece has twin surpluses and employment is rising again. That is why for investors it is much easier to make a bet on Greek stocks and Greek credit, and more specifically Greek banks.”

Global audienceYou could say backing the weakest of Europe’s bail-out recipients is not the most imaginative trade. Economies that suffer severe contractions — Greece has had 25% knocked off its GDP since 2008 — are typically prime candidates for a rapid rebound once the bottom is hit.

But the speed with which Greek banks have brought back what investment banks would call high quality investors has been nothing short of remarkable.

Greek bank equity was inevitably a US hedge fund dominated trade in the first round of capital raises last summer, after the Bank of Greece commissioned Blackrock to tell the banks just how short of capital they were. They were also helped along by some cleverly structured transactions that offered early believers a lot of upside through warrants on shares issued to the Hellenic Financial Stability Fund.

But deals from each of the big four — Alpha Bank, Eurobank, Piraeus Bank and National Bank of Greece — this year have shown the pool of demand has quickly expanded to include many long-only and emerging market accounts.

Pimco, a mainly fixed income investor, made one of its first big European equity investments ever in Eurobank’s €2.9bn deal in April, for example. Eurobank also saw strong demand from Asian accounts,

showing the sheer breadth of appetite there has been for the Greek recovery story.

The response was even more encouraging given Blackrock identified another €6.4bn of capital requirements in March. Since then the big four have raised a further €8.4bn, attracting more than €10bn of demand in the process. “You might have thought investors who bought Greek bank equity last year on the basis that that would be enough capital would have balked this time around,” says Saadi Soudavar, a managing director in Deutsche Bank’s equity capital markets team, “but many investors have been more than willing to put additional money in to completely de-risk Greek banks’ balance sheets.

“Last year investors were betting Greece would stabilise in three or four years but these investors have in some cases made their target returns in a year, while others have been later to the party but still see upside.”

Equity tends to make the most exciting story in turnaround situations. But investors have also shown renewed confidence in Greek bank credit this year.

Piraeus firstIn March CCC rated Piraeus Bank became the first Greek bank to access the bond markets since the country’s 2010 bail-out, issuing a €500m three year senior unsecured bond at 5.125% when less than a year earlier bankers would have put the theoretical coupon in the double digits.

The final book comprised €3bn of orders from 240 accounts with 91% of the bonds allocated outside Greece and 59% going to fund managers and insurance companies.

A month later National Bank of Greece was able to shun the traditional three year maturity typically chosen by periphery

A few short years have transformed Greek banks from diseased pariahs into exposures suitable for long-only investors. The world’s most infamous banking sector is out of the danger zone and there is excitement about potential returns. But does Greece possess an economy structured to fulfil that promise and are the banks strong enough to support it? Tom Porter reports.

Banking sector emerges from realm of fear and speculation

“Many investors have been more

than willing to put additional money

in to completely de-risk Greek banks’

balance sheets”

Saadi Soudavar, Deutsche Bank


BANKING SECTOR

banks after years out of the market, printing a €750m five year senior deal with a coupon of 4.375%. Fund manager and insurance participation was lower at 49%, but orders still totalled €2.25bn from 170 accounts and the deal was priced some way inside the five year printed by the Greek government at 4.95% on April 10.

Greek banks are clearly not short of an investor base, and Alpha Bank and Eurobank are expected to demonstrate access to the bond market with similar success before long.

“The interesting thing in terms of investor demand in recent months has been appetite from Italy and Spain, which were never really aggressive buyers of Greek credit,” says Georgios Michapoulos, senior manager of Alpha Bank’s financial markets division.

“Very recently we have had more interest from accounts in Germany. Things are becoming more normal, we had a lot more investors from core Europe in the old days and we are moving back to that. The return to the senior unsecured market is a sign of strength for the Greek banking system and we definitely want to come back to the market.”

There are investors who do not see what the fuss is about, and spy textbook bull market behaviour. Some question why they would hold the debt of Greek banks, which have plenty of government bond exposure, when they could buy sovereign risk directly but with a high yield. Others prefer to hold lower ranked debt in better rated banks, feeling that paying coupons on senior and hybrid debt become equally discretionary at highly stressed banks.

Other market participants feel Greece has benefited from a global hunt for yield, and more interestingly recent turbulence in emerging markets. The 200bp-300bp of extra coupon Greek banks offer compared to some EM banks starts to look ever more appealing when set against political risk in places like

the Middle East and Ukraine.

Better marginsSo what exactly is it that has caused participating investors to put away their lengthy barge poles and effluent-covered sticks and reach for their wallets?

“The shift since last year has been dramatic and this was triggered by the recapitalisation of the whole sector post the Blackrock analysis results,” says Daniel Shore, head of northern European and Greek DCM at HSBC. “This has given investors comfort over the capital positions of the banks and given a significant proportion of them the confidence to invest in senior unsecured debt.”

Investor returns and the health of the Greek banking system are, of course, not mutually exclusive. Buyers have been willing to put in more cash for the obvious benefit of holding shares in banks with capital ratios second to few in Europe.

But what investors are really excited about is the Greek banks’ ability to profit from an impending economic turnaround after a deep six year recession. Last month Moody’s finally raised its outlook on the Greek banking sector to stable from negative, largely because of its forecasts for 0.4% GDP growth this year and 1.2% growth in 2015.

The potential of the four major banks has been greatly increased

by the whittling down of the 19 banks operating in Greece in 2010 to just six today. That has created a cosy operating environment for the four major banks, with the other two remaining institutions having around 1% market share between them by consolidated assets.

“Banking margins may not fall even if loan spreads and deposit spreads fall,” says Deutsche Bank’s Vannier. “People expect that as funding spreads fall not all of that will be passed on to customers. So interest margins may actually expand as the banks will hold on to some of the difference. That is very attractive to investors.”

Lack of competitionWhat is attractive for investors may not be good for customers, of course. Given how close Greece came to not having a commercial banking sector it seems faintly ridiculous to worry about a lack of competition between the banks that survived intact. But state-sanctioned oligopoly is a term often used to describe Greek Banks 2.0 and it has been developed at a time when countries like the UK are trying to respond to disgruntled customers by encouraging new entrants.

But the benefits outweigh the costs, says Nondas Nicolaides, a senior analyst at Moody’s.

“With four big players there shouldn’t be a lack of competition,” he says. “This structure has been created in consultation with the troika and the consolidation has had a positive effect on costs in the banking system. A lot of smaller banks that were in the system have been cleaned up and the good parts of those have been absorbed by the major players. They will be operating on a much more professional level than those smaller players.”

What’s more, many of the economies of scale tied to the consolidation, such as cutting staff and closing branches, are still to be realised. In the first nine months of 2013, operating expenses fell 2.1% year-on-year partly because of salary

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Industry

Trade

Tourism

Shipping

Construction & RE

Other household lending

Housing loans

%

Greece’s year-on-year credit growth by sector

Source: Moody’s


BANKING SECTOR

and staff reductions, according to Moody’s. That helped the Greek banking system’s cost to income ratio fall to 67.1% in September 2013 from 77% a year earlier, though it remains well above the mid-50s figures regularly recorded between 2005 and 2010.

There are some even more lucrative effects of a return to positive economic growth that equity investors are expecting. The Greek lenders’ stock of non-performing loans is the ugliest problem facing the banking sector, with the volume of distressed assets expected to rise to around 37% of total loans by the end of this year from an already

high level of 32% at the end of 2013. But banks have reported a slowing in the growth of NPLs and they are forecasting a drop as early as 2015, lagging the return of economic growth by a typical three or four quarters.

“There is now speculation as to how far GDP growth can go,” says Vannier. “Specifically for the banks that could translate into not just non-performing loans peaking but into actual write backs of provisions.

“Those numbers are potentially significant because NPLs in Greece are around one-third of the outstanding loans, and provisions are about 16% of total loans. If you reduce provisions by 10%, that’s 1.6% of total loans which are written back and the effect on capital could be very large.”

The stock of NPLs — and provisioning for them — is still one of the biggest drags on Greek banks’ operating income. It is the main reason Moody’s reckons they will remain loss-making throughout 2014, with provisioning charges expected to be between 2% and 2.5% of average gross loans, down

from 2.74% reported for the first nine months of 2013. But the ratings agency says some of the banks could return to profit at some time next year, as higher net interest margins combine with lower operating costs to push up pre-provision income.

Relics of the boomFor all the potential Greece’s banking system evidently possesses, there are still some serious reasons to rein in this optimism.

The biggest one is the volume of NPLs, and general asset quality within the banking system, says Moody’s analyst Nicolaides.

“As the economy starts to turn banks will have to start lending again and the stock of NPLs will have to be resolved one way or the other, either by foreclosing collateral, restructuring loans or even promoting consolidation among receptors,” he says.

“Obviously this has to be for viable clients. A portion of these NPLs are tied to corporates and SMEs that have no sustainable business model.”

So while NPLs are on a downward trend and there is a

chance banks will benefit from some big write-backs as the economy recovers, there is also the possibility that plenty of money lent out to bad companies during the credit boom will never be recovered. The problem for the banks is that it remains difficult to accurately measure potential loan losses in Greece because of illiquid markets for the collateral backing them, such as residential and commercial mortgages.

For example, the Bank of Greece estimates that by December 2013 nominal apartment prices had fallen by 33.7% since the third quarter of 2008. It estimates because there simply aren’t enough property transactions to know for sure. Ireland and Spain have worked through similar problems, but the uncertainty reduces the value of the collateral held by banks to cover non-provisioned NPLs.

That is not a problem you want to have with the European Central Bank in town conducting its asset quality review this year, and there are signs that the Greek banks are addressing it with a little more urgency. Up to

now, says Lazaros Papagaryfallou, executive general manager of strategy and investor relations at Alpha Bank, the focus has been primarily on managing the flow of NPLs through loan restructurings.

“There is a shift to managing more actively the stock of NPLs,” he says. “We have seen increasing interest from foreign investors in disposal of non-performing assets. Last year it was more difficult to entertain this interest. We don’t see any significant volume of sales imminently but we are engaging in discussions and we cannot exclude transactions 12 months down the road.”

Coalition pressureAnother big risk is political uncertainty. The country’s local elections in May provided the first big test of Antonis Samaras’ fragile coalition, while in the subsequent European Parliament elections, the main opposition party Syriza came first, though not by a big enough margin to destabilise the government.

Greek government bond yields have been creeping up on fears that a fresh bout of political uncertainty or a collapse of the ruling coalition could derail both the economic recovery and the country’s relationship with its principal creditors.

Samaras’ government has imposed crippling austerity measures in line with the EU/IMF bail-out, and the level of ill-feeling towards policies “made in Berlin” and enforced by Brussels should not be underestimated.

Even investors with short memories will recall the markets’ terror at the growing relevance of the anti-EU far-left Syriza party and the even more anti-EU far-right Golden Dawn in the Greek political landscape.

Wages have been cut by 40% for teachers and 30% for everyone else. Unemployment is at a record 28% and youth unemployment is double that.

A further 11,000 public sector workers are facing the sack as a condition of the latest tranche of bail-out money, which Syriza’s leader Alexis Tsipras called a “death contract” for the Greek people. Thousands have fled to Australia

“With four big players there

shouldn’t be a lack of competition”

Nondas Nicolaides, Moody’s


BANKING SECTOR

and Canada. Greece faces a lost generation on top of its lost decade.

It is little surprise there is a prominent view in the country that a cut-and-run from the euro might solve a few problems.

“If we have any negative political developments that hurt confidence either for investors or for depositors that could jeopardise all the improvements we have seen in the funding profiles of banks up to this

point,” says Nicolaides.Yet another big risk is the structure

of the Greek economy itself. The question is where sustainable growth will come from in a country that does not yet possess the kind of export industries of an Italy or a Japan, two of the very small number of states that can even rival Greece’s debt to GDP ratio of 170%.

Fuelling growthGreece is perhaps one of the finest examples of the varying levels of fantasy that gripped the developed economies in the pre-crisis years. Iceland decided its fisherman could become bankers and nearly went bankrupt. The UK decided its commercial banks could become global investment banks and is still sifting through the debris at Lloyds and Royal Bank of Scotland. Greece, meanwhile, got itself into the euro and set about inflating its small economy by fuelling the growth of consumer-driven industries with debt.

But the Greek banks are confident that restructuring bad loans will not be the sum total of their business over the next few years.

“We expect the recovery to translate sooner or later into

healthier demand for loans related to new business activity, and not simply to cover holes in the financing of particular companies,” says Michael Massourakis, senior manager of Alpha Bank’s economic research division.

“What we are seeing is a recovery in primarily business loans and the demand will come from the infrastructure, energy, tourism and waste management sectors.”

While private sector credit demand remains subdued, the banks are being forced to take tough decisions to shift capital away from those businesses that stand as relics of the pre-2008 boom and focus on companies that can be competitive. Greece’s comparative advantage is its geography. That means industries such as tourism, shipping and transportation, energy and agricultural products will provide growth in the medium and longer

term. “Talking to the banks it seems

there is already a reallocation of capital towards more productive and export-oriented sectors and away from consumer-driven sectors,” says Nicolaides.

“Lending volumes are still declining but that doesn’t mean there is no new lending going on. One of the sectors receiving more is tourism, where there is still plenty of room for growth.”

In fact, year-on-year growth in lending to tourism businesses was positive throughout 2012 and 2013, turning negative for the first time since December 2011 in March. Year-on-year growth in lending to the construction sector has been positive

since June 2013, and has only been negative for eight out of the 49 months between the March 2010 bail-out and March 2014. Lending to sole proprietors has also been edging up in recent months, according to Moody’s data (see graph).

For Greek banks to have presented their story and brought back such a diverse group of investors is some achievement. The next step is to get capital into those industries banks believe will drive the country’s economy in the future.

“It’s one thing to have a good supply side of the economy,” says Massourakis, “it’s another to have actual investment taking place.”

“We have created all the right conditions for growth and investment to pick up in the last four years but we need the catalyst from foreign direct investment flows and more privatisation, so that foreign capital can take advantage of the good profitability conditions that are developing gradually in the Greek economy.”

Manolis Glezos stepped down from the war reparations working group last month, saying it had degenerated into a “study group”. The 91 year old successfully stood for Syriza in the European elections, and plans to raise the issue in the very first session of the European Parliament. But even if Germany agreed to pay the €162bn (excluding interest) campaigners say is owed, it would still only account for half the country’s national debt.

Greek banks are well positioned to profit from what could be a very exciting recovery story. But their operating environment has a long, long way to go. s

“We expect the recovery to translate

into healthier demand for loans

related to new business activity, and

not simply to cover holes in financing”

Michael Massourakis,

Alpha Bank

Greek banks’ funding profile

Source: Bank of Greece

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Domestic Private -Sector Deposits (LHS) ECB Funding (RHS) Emergency Liquidity Assistance (RHS)

Greek banks’ funding profile

Source: Bank of Greece


CORPORATE FINANCING

THE TRAFFIC in Athens is get-ting bad again. In a city notorious for congestion, this is a good sign — people have money to put fuel in their cars.

Shops that closed down are begin-ning to re-open, too. But you still need a lot of optimism to be cheer-ful about this economy, wrecked by a six year recession that wiped 25% off GDP.

The corporate sector in Greece has suffered much worse than elsewhere in Europe. The state’s insolvency destroyed domestic demand, and Greece had few competitive export-ers. The Athens stock market fell 90% between 2008 and 2012.

Fortunately, optimism abounds — in financial circles, at least. “There are some signs that recovery is about to start,” says Dinos Kamaris, head of global markets and capital financ-ing, Greece at HSBC in Athens. “The Greek economy in 2014 is going to stabilise — the GDP growth rate will be either slightly negative or, we hope, marginally positive. In mar-kets we’ve seen a recovery and rein-troduction for Greek names, but in the real economy it’s still coming.”

Output is still contracting slightly year-on-year and exports have not yet begun to recover. But if finan-cial markets are leading indica-tors, revival is coming. “Greece has gone full cycle,” says Nicholas Exar-

chos, Deutsche Bank’s head of capi-tal markets and treasury solutions for Greece and Cyprus in Athens. “A year ago it was the underdog of global capital markets. This has now totally changed, both in perception and action. The austerity measures, which have been extremely serious, have had the result that Greece has now at least stabilised and found its feet. The corporates and banks that have gone through tectonic plate movements and survived the cri-sis are now stronger, and reinforced against any other potential crisis.”

Recovery playSince the stock market hit bottom in June 2012, just before the election that brought the present coalition to power, it has rebounded by 188% — though since April it has fallen back again by 21%.

Investors have become willing to touch Greece. US hedge funds like Third Point were first to come back, buying sovereign bonds ultra-cheap. When those bets paid off, they start-ed buying equity in the Greek bank recapitalisations of 2013. They were joined by other adventurous inves-

tors including more hedge funds like Paulson & Co, some long-only funds, Middle Eastern and Asian investors and even Pimco, mak-ing one of its first big European equity investments. Both emerg-ing and developed market funds are now eager to get in on Greece’s recovery play.

So far, equity issuance has almost all been by banks. Family shareholders sold 8% of Aegean Airlines in April for $51m, but that was an exception. More repre-

sentative was the decision in 2012 by Coca-Cola Hellenic Bottling Co, Greece’s most valuable company, to move its primary listing to London and its incorporation to Switzerland.

“There are a few non-financial

companies that could issue equi-ty in coming months, but a lot of firms are still family-held and dilu-tion has always been an issue for them,” says Saadi Soudavar, manag-ing director in equity capital mar-kets at Deutsche in London. “Many also still view valuations as below where they would want to be issuing equity. We should see wider inter-est in Greek corporates from inter-national investors going forwards, but international research coverage is not as widespread as it used to be, and many of the companies are very small, so freefloat and liquidity are also impediments for investors.”

Painful restructuringInternational capital is returning to Greece enthusiastically, but in very select patches. The overall experi-ence of companies in the past six years has been extremely difficult.

“One of the reasons growth rates declined so fast is that markets start-ed penalising Greece for its under-performance,” says Vassilis Kara-mouzis, head of global markets sales, Greece-Cyprus, at HSBC in Athens.

Before the crisis Greek companies had relied for financing very heav-ily on banks, especially the Greek banks. Originally well run and capi-talised, without the rash property lending that felled those in Ireland and Spain, they were savaged in the crisis, first by a run on deposits, then by the haircutting of Greek sover-eign bonds, which left them with a gaping capital hole. Meanwhile, most foreign banks pulled out.

Many companies had to go through long and complicated refi-nancing negotiations with their banks. Once they have extended bank loans, the next step for many larger Greek companies has been to explore the bond market.

“At the beginning of the euro,

Companies in Greece have worked exceptionally hard since 2008 to restructure, refinance, cut costs and assets and keep going. Many have fallen, but most of Greece’s leading firms have survived and emerged more competitive, thanks to their own efforts, continued support from banks and the lifeline thrown by the high yield bond market. As Jon Hay discovers, companies and investors are now positioning for the upswing.

Greek companies get back on the road, with help from bonds

“There are some signs that recovery

is about to start”

Dinos Kamaris, HSBC


CORPORATE FINANCING

the Greek banks offered very low spreads on loans,” says Kamaris. “For most corporates there was no reason to look into debt capital markets. When they could not get funded locally, because of the exo-dus of the deposit base, they had to look for alternative sources of fund-ing. There were companies with a strong foreign parent, or with the majority of sales overseas, or with extremely strong and stable sales in Greece, that needed to borrow money and they turned to the debt capital markets.”

One of the first to sort out its finances was OTE, the Hellenic Tel-ecoms Organisation. Though 40% owned by Deutsche Telekom, it still had to strive for successive bank refi-nancings, avoiding default as reve-nue crashed from €6.3bn to €4bn.

In April 2011, OTE managed to issue a €500m bond — the first from a Greek company for 17 months. That kept it going throughout 2012, when the crisis reached its height. But it was nearly two years before OTE was able to issue again.

From October 2011, bond markets all but closed to Greece. From €87bn of issuance in 2009, all Greek bor-rowers managed just €856m in 2012, according to Dealogic. Syndicat-ed loans kept going at €2bn-€5bn a year, but deals were laborious.

Bond gates re-openThe breakthrough came in Decem-ber 2012, when the high yield bull run began to embrace Greece. In the space of a week, Fage, the Greek yoghurt maker that had just moved the main body of the company to Luxembourg, issued a $250m bond at a 9.875% coupon, and Titan Cement raised €200m at 8.75%.

Investors’ willingness to finance companies fully exposed to Greece was proved in February 2013, when OTE returned with a €700m five year bond at 8% and won €1.9bn of orders. Eight months earlier, its 2016 bond had been trading to yield 23.5%.

Greek corporate bonds then streamed out, totalling €4.7bn in 2013. Nine shipping companies issued, almost all in dollars, includ-ing two firms in the New York-listed Navios Group, which raised $1.3bn.

More typical high yield issuers included Frigoglass, which supplies

drinks fridges and glass bottles on five continents. There were even two bonds to finance leveraged buy-outs. Rhône Capital bought 39% of S&B Minerals, which mines bentonite, perlite and other ores, with a €275m bond.

“The corporate survivors are those that export more, stopped look-ing at acquisitions, like in the past, and refocused on their core busi-nesses,” says Eleni Vrettou, head of wholesale banking for HSBC Greece. “They contained their cost bases to increase efficiency and ensure they had the resources to with-stand the crisis. The companies that managed to do that were the ones that could tap the capital markets.”

The most ambitious financing came in October: a €400m issue for Emma Delta, a vehicle used by Czech billionaire Jiři Šmejc and Greek shipowner Georgios Melis-sanidis to finance the €844m acquisition of a 33% stake in OPAP, the Greek state lottery operator.

This year has brought more deals, including for Public Power Corp, which had not issued a bond since 2000, and both Greece’s oil refiners, Hellenic Petroleum and Motor Oil.

More new borrowers will appear, Karamouzis predicts, although there are not that many more companies in Greece large enough to issue. Fur-ther deals will come from repeat issuers.

“It is up to the banks and capital markets to come up with new prod-ucts that will give smaller and medi-um sized companies an opportunity to access the markets”, he says. The Italian mini-bond market is one pos-sible model; another would be funds intermediating between investors and small ticket borrowers.

Banks stir againCorporate loan provision, though much bigger in volume, has not yet recovered as vigorously as the bond market. But in the past few months, the stale air of Greek banking has begun to move.

“Some international banks are re-entering the market to lend to top companies, very cautiously,” says Vrettou. “We haven’t seen any big underwriting tickets yet, but they are looking at Greece again. It will also be interesting to see Greek

banks increasing their credit lines.” For international banks, the Greek

government’s sale of a €3bn five year bond in April was crucial. “It was a very significant step because it gave us confidence in the yield curve, which had previously been bro-ken,” says Exarchos at Deutsche. “As a lender it was difficult to put new debt into Greece because if the risk-free rate was 25%, credit would not allow you to lend below that. Now we have a yield curve to work with again.”

While Greek companies have been rehabilitating themselves in the debt markets, this is not enough. “What Greece has been missing, since before the crisis, is sticky capital — foreign direct investment,” says Exarchos. “When that comes back, it will be the sign that the crisis has passed.”

Deals are happening. Socar of Azerbaijan is buying a majority stake in the gas transmission network. US private equity firm Paine & Partners has bought Eurodrip, which makes irrigation pipes, while Paulson has acquired 10% of the Athens Water Supply and Sewerage Co.

Bankers are particularly encour-aged by some property deals, which could lead to IPOs. Last year Invel Real Estate Partners and York Capi-tal Management paid €653m for a 66% stake in NBG Pangaea, which houses National Bank of Greece’s offices and branches, as well as other buildings.

“Greeks have been toiling away and the foundation has been built,” says Exarchos. “Greece had a huge credibility deficit — we had to pay it back. It is coming back, on a politi-cal, economic and social basis. It’s not a rosy picture —this is not the end, it’s the beginning. There is a lot of work to do.” s

“Greece had a huge credibility

deficit — we had to pay it back”

Nicholas Exarchos, Deutsche Bank


VIEW FROM THE BUYSIDE

JÖRG WARNCKE, a senior fund manager at Union Investment in Frankfurt, appears to reflect the views of many investors when he explains why he was not attracted by April’s landmark five year bond issue which marked Greece’s return to the bond market after an absence of four years. “As a long term investor, my horizon is the next two years, rather than the next two weeks,” he says.

Warncke says that it is probably easy enough to explain why the €3bn five year bond drew such strong demand of more than €20bn from about 600 investors. “There are a couple of explanations for the success of the bond,” he says. “The first is that some investors tend to have short memories. The second, much stronger reason is the strength of the technical momentum behind demand for European peripheral government bonds.”

Miranda Xafa, an independent Athens-based consultant whose main clients are hedge funds, says that another key technical driver of demand was the limited rollover risk. “Maturity extensions on the EFSF loans and the so-called Greek loan facility means that there is now very little official debt due in the 10 year period after 2012 when these extensions were agreed,” she says. “Courtesy of European taxpayers who are now making a near-zero return on their investment in Greece, there is virtually no rollover risk over the life of the five year bond.

To Warncke, however, long term political risk outweighed the potential short term returns driven by this technical momentum. “The only reason to participate in the bond issue would have been certainty over the troika’s support mechanism, but that very much depends on political developments in Greece,” he says.

Other investors agree that political risk was an important

consideration in weighing up the case for supporting Greece’s return to the capital market. “Since the last election, the government has lost the support of a number of MPs, leaving it with a very fragile majority,” says Russel Matthews, portfolio manager running European bond strategies at BlueBay Asset Management. “Concerns about social cohesion are rising, given the support that parties like Golden Dawn have been attracting. So there are considerable risks to the Greek recovery story going forward.”

The political risk in Greece, says Warncke, might have been worth taking had the pricing on April’s benchmark been closer to 10%. That is a very far cry from the 4.95% level that was in turn well inside the initial pricing guidance of between 5% and 5.25%.

“I was initially looking at the alternatives available with a running yield in the area of 5.25% which was being rumoured before launch,” says Warncke. “The final pricing of 4.95% was very ambitious compared to some emerging markets with higher ratings and better economic prospects.”

Low pricing for high riskJon Jonsson, managing director and senior global fixed income portfolio manager at Neuberger Berman in London, was also unimpressed by the pricing of Greece’s five year bond. “Greece is certainly on the right track, and investors obviously saw the bond issue as a good way of playing the QE story in Europe,” he says. “But it’s all about pricing, and at the yield Greece was offering I think there were better options elsewhere, such as European structured bonds or mortgage bonds in the US, which pay similar yields but have stronger fundamentals.”

Investors reporting that they

bought the Greek bond in April acknowledge the longer term political and economic risk, but say that this was outweighed by the potential short term returns. BlueBay’s Matthews says that his firm bought a modest position in April’s issue for two of its funds, one of which aims to maintain a benchmark weight in Greek bonds.

But Matthews hardly gives a ringing endorsement to the case for investing in Greece. “The predominant reason for our participation was the very strong technical support we’ve seen for high beta, high yielding eurozone securities,” he says. “With Bund yields at 150bp and Spanish five year bonds trading just through US Treasuries, we believe the Greek issue looked attractive from a yield perspective.

“We also acknowledge that there has been a significant improvement in Greece’s fundamentals. The fact that Greece has been able to generate a primary surplus and that the decline in GDP has moderated significantly are clear positives for Greece. Given that the level of support for Greece at an EU level is immense, there were a number of fundamental reasons for buying the paper.”

Matthews adds, however, that there are still plenty of reasons for

In spite of the bumper demand for Greece’s five year bond issue in April, many real money investors remain reluctant to get back into Greece, concerned chiefly about long term growth and political risk. Philip Moore reports.

Bond market blow-out masks investor caution

“Concerns about social cohesion are

rising, given the support that parties

like Golden Dawn have been attracting.

So there are risks to the Greek recovery”

Russel Matthews, BlueBay Asset Management


VIEW FROM THE BUYSIDE

being cautious about Greece, and that on the basis of fundamentals there may be more compelling alternatives elsewhere in Europe. “We’ve been big supporters of Portugal and Slovakia over the last couple of years because we believe the combination of domestic political stability, EU support and a slight improvement in economic fundamentals has been a very powerful story,” he says. “By contrast, we remain cautious on Greece over the long term because of the domestic political uncertainty.”

Other investors agree that, on balance, Greece still looks better from a technical than a fundamental perspective. “ECB support and the OMT statement were of critical importance for Greece,” says Jeremy Lawson, chief economist at Standard Life in Edinburgh. “One of the biggest mistakes that the EU made during the second round of the crisis was giving the impression that there were circumstances in which Greece would be forced out of the euro. Realising the error of that judgement and emphasising that it is prepared to provide the right level of assistance has played an important role in supporting Greek asset prices.”

But Lawson echoes others when he says that there are plenty of risks associated with the outlook for Greece. “Political risk remains high, with the opposition rejecting a number of the reform recommendations proposed by the troika and the OECD,” he says.

“The second area of concern is that if everything goes to plan, the public debt will reach 120% of GDP by 2020. But this assumes that there is no global downturn over the next six years. If there is any kind of downturn over that period, leading to a decline in revenue and an increase in welfare spending, the sustainability of Greece’s public debt will be thrown into question.”

Signs of stabilityLawson recognises, however, that there are also a number of encouraging incipient economic indicators suggesting that Greece’s fortunes may be on the turn. “Recessions don’t last

forever, and we are now starting to see signs of stabilisation with industrial production growing slightly on a year on year basis and Greek PMIs close to the 50 mark,” he says. “Another positive signal is that Greece has expressed its commitment to implementation of the majority of the OECD’s recommended reforms, especially on the labour market and tax collection. If these are followed through I would expect the Greek economy to grow in real terms over the next two to four years.”

A number of analysts point out that investor demand for the Greek sovereign bond is by no means the only barometer of the improved international sentiment towards Greece. At the end of April, Deutsche Bank hosted an investor visit to Athens which took in meetings with the finance ministry, central bank, IMF, EC and PDMA, as well as representatives from the banks and private sector.

One of the main takeaways from this investor visit, itself an indication of rising international interest in Greece, was that “while all focus has been on the new GGB issuance, the bigger story is the large amounts of equity capital raised by Greek banks in recent weeks. The banks have issued more than twice the amount the sovereign has raised,” Deutsche reported.

The recognition that recessions don’t last forever — even those as deep and damaging as Greece’s — has been an important source of support for the broader Greek equity market in the past 12-18 months. Greek equities were among the world’s best performers in 2013, featuring

alongside Iceland and Ireland in the list of the top 10 stock markets of the year. That rewarded the handful of hedge funds and other contrarian investors that were prepared to take a bet on the so-called “Grecovery” at the height of the crisis, with Greek equities having plunged by 35% in 2010 and 52% in 2011.

“When everybody else was pulling out of Greece two or three years ago, we felt there were some very compelling opportunities,” says George Zois, head of the Greece and Cyprus desk at Exotix in London. “On the fixed income side, a number of our clients, especially from the US, came into the market when Greek government bonds were trading at 15 or 20 cents in the euro. They then shifted into equities, and we saw a lot of interest in the most liquid companies such as Motor Oil, OPAP and Frigoglass.”

Fair value?The strong performance of the Athens market in the past 12 months has made the valuation story less compelling, even though Greek equities still look cheap relative to other eurozone markets. “Even though prices have come off recently it is now much more difficult to make the valuation argument,” says Zois. “To justify some of today’s valuations we will need to see EPS growth coming through. Given recent corporate results, which have generally not been very encouraging, that is unlikely to happen over the short term.”

For the time being, analysts say technicals should favour Greek equities, which late last

year returned after a 12 year absence to the MSCI emerging markets index. As Zois says, this means that Greek equities ought to appeal to emerging market as well as some developed market investors. “Throughout the crisis period the Greek trade was driven primarily by hedge funds,” he says. “But the best way to describe Greece is as an advanced emerging market, which is why real money accounts have been gradually dipping their toes in the water.” s

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Greece’s general government debt

Source: OECD

HSBC operates in various jurisdictions through its affiliates, including, but not limited to, HSBC Bank plc who is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, The Hongkong and Shanghai Banking Corporation Limited, HSBC Securities (USA) Inc., member of NYSE, FINRA and SIPC, and HSBC Bank USA, NA. AC29027

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May 2013

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of EUR notes totalling EUR1.75bn

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