Greece: Grexit Fears Quieted, a Grecovery Underway

As 2018 kicks off, one long-running issue has dropped off the obligatory new year lists of “market risks”: Greece. For years, as the country endured three bailouts and two defaults (not to mention never-ending protests, complete with riots and Molotov cocktails), investors feared the Hellenic Republic’s debt crisis would splinter the eurozone and send the global economy down the drain. Even as most of the eurozone moved on in 2013 and beyond, the word “Grexit” still sparked fear in many folks’ hearts, thanks to continued financial problems and 2015’s political circus. But throughout last year, Greece’s situation improved. By yearend, it scarcely made headlines—except the occasional bullish one. We can see why: Greece’s saga just isn’t that exciting anymore. The economy is growing, politics have settled down, foreign capital is trickling in, and the country is slowly moving on from this dark era. Now, we wouldn’t rush into Greek stocks as a result, but this progress shows how far the eurozone has come since the crisis—and how sentiment has evolved.

For years, Greece couldn’t attract foreign investment to save its life. (Literally.) But that changed in July 2017, when Greece returned to the international bond market for the first time since Prime Minister Alexis Tsipras and his Syriza party barnstormed Parliament, ignored prior reform commitments and nearly crashed Greece out of the eurozone by calling a referendum on the third bailout. The bailout ultimately went through, but not before Greek leaders adopted capital controls, voters rejected the aid package (and its tough conditions) and Tsipras made the mother-of-all political U-turns. Meanwhile, Greek bond yields soared, stocks tumbled and a nascent economic recovery turned south.

Lately, however, things are looking up. Despite dismal poll numbers and a slim majority, Tsipras managed not only to hang on to power, but to ram a bunch of reforms through Parliament. Greek GDP has grown in four of the last five quarters—granted, it is rising off a low base, but a recovery is a recovery. As the situation stabilized, bond yields steadily eased, closing 2017 at pre-crisis levels. The government is taking advantage. In November 2017, the Treasury pulled off a successful €30 billion voluntary debt swap, with investors trading bonds issued after 2012’s debt restructuring (read: default)—and yielding around 20%—for a suite of new issues with maturities ranging from 5 – 25 years and yields of 3.5 – 4.2%. That investors would voluntarily take such a large hit in yield speaks volumes of the improvement in Greece’s creditworthiness, while cheaper funding should help make Greece’s life easier in the coming years. This also bodes well for the handful of bond auctions Greece plans for 2018 as it prepares to exit the bailout in August.

To see just how much Greece has improved lately, consider the progress made on the privatization front. For years, we have enjoyed poking gentle fun at the Hellenic Republic Asset Development Fund (HRADF), established in 2011, for managing to privatize more of its leaders than pieces of state-owned property. By the third bailout in August 2015, it had privatized only about €3.5 billion worth of assets. But in 2016 and 2017, HRADF’s successor (Hellenic Corporation of Assets and Participations, or HCAP) finally managed to close some huge, contentious deals. In 2016, they sold a 51% stake in the Port of Piraeus to China’s COSCO, completing a deal that inspired protests for years beforehand. They followed up in 2017 by leasing a bunch of regional airports and, in the year’s final days, selling a 67% stake in the Port of Thessaloniki to a German fund. This brings 2017’s total privatizations to about €2 billion, a banner year. HCAP aims to raise at least €3.5 billion in 2018. Creditors are pleased with the privatization progress, and while the “for sale” list remains long, the more Greece’s economy recovers, the better the price these assets can fetch. We always thought Greek leaders had a point when they complained about being forced to sell off valuable assets at bargain basement prices during the depths of the crisis. That isn’t so much an issue today.

 While the economy has contracted more than 25% since the beginning of the debt crisis—and yes, it has the eurozone’s highest debt-to-GDP ratio—things are improving now. After flipping between growth and contraction for several quarters after 2015’s political crisis, GDP has grown for three straight quarters now and is up 2.5% from Q3 2015’s low.^[i]

Meanwhile, more people are back at work. While still well above eurozone averages, unemployment has been trending downward for nearly four years now and is at the lowest level since October 2011—and not just because of falling labor force participation. Since Greek employment bottomed in March 2015, the number of employed workers has risen 11.9%.^[ii] And more recent data suggest better times may continue. November’s Manufacturing Purchasing Managers’ Index hit 52.2, with forward-looking new orders hitting a 45-month high. Life is still hard for many Greeks, with poverty rampant. Things aren’t going to turn wonderful overnight, and recoveries take time. But it is fair to say we are seeing green shoots.

However, none of this is a reason to rush into Greek stocks. Despite lots of talk about Greece being the last cheap place left to buy, much of this is based on P/E ratios, which aren’t predictive. If low Greek P/Es were a reliable “buy” signal, then Greek stocks would be outperforming massively since 2011. Plus, Greek markets these days are basically a play on Greek banks—they comprise about 43% of MSCI Greece’s market capitalization. Many problems remain there, including heavy government involvement and record levels of bad loans to name a couple.

The bigger takeaway is what Greece shows about investor sentiment overall. There have clearly been some fundamental improvements. But the bigger change has been in how investors view it. In just a few short years it has gone from “a problem for the entire world economy” to “cheap,” even without fundamental improvement of the sort we saw in Spain and Portugal. It took several years, but investors are finally moving past the eurozone crisis—just one more sign of their rationally optimistic bent.