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Greek Musings

September 21, 2011

I’m going a bit off topic today. It’s primarily because I’m so annoyed by the general ‘expert’ commentary on the Greek debt crisis. As background, I’ve been reading “This time is different” by Reinhart and Rogoff which I picked up at a church charity event for the princely sum of $1.00. It’s an excellent, if somewhat opaque, book.

So let me spit it out right away. Greece should stop dawdling around and just default on their foreign-held bonds without any delay. The EC, the BCE and the IMF be damned! Greece is going to default anyway so let’s get it over with now, if possible using a structured default approach, and start the mending process. If anything, history has shown us that when sovereign debt gets too large in proportion to the domestic economy the only outcome possible is default or a managed restructuring. So what’s standing in the way? Glad you asked. It’s those whiney owners of the Euro Banks that don’t want to take a haircut. Not unlike the US situation in 2008/09 the Banks (and I really mean the major Bank shareholders here) don’t want to pay for the mistakes that were made and take the haircut that by all rights they should. After all, isn’t the situation in which the Banks (Euro now, US then) find themselves their own fault? Why were the Euro banks lending to a profligate Greek political class in the first place? They, of all players, should have known that Greece would never be able to repay the sums that it was borrowing and wasting on operating costs.. that’s right, the Greek government was borrowing huge sums to spend on operating costs. The banks were complicit, so let them suffer! Do you think any of the banks who lent to Greece would let you or me take out a large loan and use the proceeds to support a lavish lifestyle? No, not on your life they wouldn’t. They would have insisted on knowing just how the borrowed funds were going to be spent (invested to create a return that, in turn, would be used to repay the loan), asked for a business forecast, looked to mitigate potential non-payment with collateral or somehow insinuated themselves into the spending process with checks and balances. How come they didn’t do all of this in the case of Greece? Well, they thought they were covered by an implicit Eurolandia guarantee. And, when things went south, the Banks somehow were able to whisper into politicians’ ears that if they were allowed to become insolvent the world would collapse.

Think about it for a minute. There is a reason that we have a well defined bankruptcy process in the US. Debtors prison was done away with long ago; society finally figured out that locking someone up for non-payment of obligations when they were unable to pay was kind of counterproductive. If you lock up a debtor how is he ever going to earn money to repay the obligation, (not to speak of the money it costs to keep him locked up)? So, as a society, we decided that it was better to allow the bankrupt to restructure their debt (sometimes wiping it out entirely) and be left with the minimum to restart an economically productive life. I think we need to do the same thing for Greece.

If there is anything to be learned from the financial crisis of 2008/09 it is that we need to adopt a more harshly capitalist system for owners of capital and ring wall with a safety net those who are only two-bit players (some would say pawns) in the system. Right. What do I mean? The money center banks in the US are TBTF but there are no rules in place to stop them speculating with depositor’s money. Does that meet the common sense rule? You bet it doesn’t, but there seems to be no political will to address this issue. The Volker rule seems to be languishing somewhere in the political process. Something is rotten in the Kingdom of Denmark (sorry Danes, no poke at you intended). Well, the Euro Banks are up to the same shenanigans. Can’t let Greece default because it would impair their balance sheets. Let’s have the Greeks mortgage their country, sell off the Parthenon, privatize their infrastructure (at a fraction of the investment cost), drastically shrink the public sector, or sell off Mikonos. It seems to me that was the same kind of thinking behind German war reparations after WWI, and we all know how that ended. Put yourself in the average Greek’s shoes. He/she didn’t decide to waste money on building a bridge to nowhere, on hiring more people to run the Greek railway than there were possible passengers and so on. At some point he/she is going to rebel and say I’m not going to pay for the mistakes of a bunch of incompetent politicians. That point is near upon us. They’ll just up and refuse to pay taxes. It’s not so hard. They did it in Iceland. Maybe some demagogue will run on a no-tax platform and get 90% of the votes. (a Greek tea party anyone?) Who can blame them?

So I say that Greek default is in the offing. What I just don’t understand is all these people saying that Greece will exit from the euro and there will be a return to the drachma. I don’t see the two as the same thing i.e. one, default, doesn’t necessarily mean two, exit the euro. Default is easy; you just stop paying interest on your debts. Hopefully you have enough tax revenue coming in to pay your ongoing operating costs. Exiting the euro, on the other hand, has some complicated logistics. You’ve got to have another currency printed and ready. More importantly but you have to force people to swap their euros for the new currency. This might be relatively easy to do in a country that prints its own currency, like say Venezuela. A decree is issued making the old currency worthless (or exchangeable at a set rate for a fixed period of time), and all bank funds are suddenly and magically expressed in the new currency. Those who were foolish enough to trust the banking system with their money simply go to the bank and withdraw their money in the new currency. With the Euro it’s a bit trickier. Once people learn that there is going to be a forced conversion they all go to the bank and withdraw their savings in euros (that’s what’s been happening for the last year or so in Greece), creating a run on the bank which has a disastrously depressing economic effect on the economy (as banks call their loans to pay depositors). So you have to keep the conversion secret. But Greece isn’t a totalitarian state (at the moment anyway) and forced conversion is politically tricky especially when you can’t outlaw transactions in euros (they continue to have the same value outside of Greece). Maybe I’m wrong, but I just don’t see this happening.

So, is there a takeaway from all this ranting? There are actually two; 1) the Greek situation will probably stumble along in its current form for a while, creating substantial volatility in world stock markets, and 2) given all this negative news there may be some nuggets of gold in the Greek stock market that are worth a look for adventurous value investors (the WSJ had a piece on Greek shipping companies today, so I’m not alone with this line of thinking… beware!).

On the second point, I have had my eye on OPAP for a while. The company has a monopoly on sports betting in Greece, primarily on soccer, and is something like 40% owned by the government. It is listed on the Greek stock exchange but has US ADRs that trade on the pink sheets (GOFPY.PK). Each ADR represents ½ an ordinary common share. ADRs are now trading for less than half they were just 6 months ago. As might be expected, given the problems in Greece, first half 2011 revenues were down 20% and operating profits about the same. Still, with the shares trading about 4.5x projected 2011 earnings and the company paying a significant dividend – in 2010 it was €1.54 per ordinary common share (which translates to about $1.07 per ADR), down from €1.75 in 2009 and €2.20 in 2008 – this makes for an interesting value proposition. Capital Research and Management owns over 11% of outstanding shares and has recently been increasing their holdings. If ADRs were to react to further negative news about Greece and drop down into the $4.00 range I might be tempted to take a position. Of course you should do your own research on this as well as other stocks I mention.


From → Investment Ideas

One Comment
  1. There are some risks to the monopoly, the gvmt may change their exclusivity.
    Coming to think about it, this is the only risk aside from currency risk they face.

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