(Bloomberg Businessweek) -- As Greece prepares for what's expected to be a record influx of sun-seeking tourists, it's also welcoming visitors of a different sort: deep-pocketed foreign investors who abandoned the country after its default more than a decade ago.
Flows of outside money into stocks and bonds have jumped about 14% this year, propelling the Athens equity market into the top three performers in the world with a gain of more than 40%. Greece is the euro area's best-performing bond market, with borrowing costs falling more than half a percentage point in 2023.
Now 10-year government bond yields, which spiked above 40% in 2012, are below 4%. (Bond yields fall when prices rise.) That's a bit less than the return investors demand on Italian bonds and only about 1.4 percentage points more than supersafe German debt. Greece could even gain investment-grade status again. In an interview with Bloomberg Television, newly reelected Prime Minister Kyriakos Mitsotakis said he aims to secure the upgrade from major rating companies this year. “It changes lots of things,” he said. “There's currently a lot of capital that cannot invest in Greece simply because we are not investment-grade.”
The European Commission expects Greece's economy to grow 2.4% this year, helped by tourism. That's more than twice the pace projected for the euro zone. Germany, blamed by many Greeks for the brutal spending cuts imposed as the price of international bailouts, slipped into a recession earlier this year. “Greece is going to be the cover story of the next 12 months,” says Marshall Stocker, co-head of emerging markets at Morgan Stanley Investment Management, who's been beefing up his Greek holdings since mid-2019. “This is the country that nearly brought down the EU.”
Greece hasn't climbed all the way out of the deep economic hole it plunged into in the wake of the global financial crisis. Through the grinding 2010s it faced an enormous debt squeeze and didn't have the flexibility to devalue its currency or adjust its monetary policy because it was a part of the euro currency zone. It came close to being the first country to abandon the euro and ultimately accepted three rescue packages. Harsh austerity and a prolonged recession—in which economic output fell about 30% from its peak—led to social unrest and protests. Greece remains the euro zone's most debt-burdened government and gross domestic product per capita is among the lowest in the euro area.
Mitsotakis has pledged to try to make up for the squeeze on households, promising to raise the minimum wage to €950 ($1,066) a month, from €780, during the next four-year Parliament. In 2010 it was €740. The 55-year-old premier from the conservative New Democracy party won a solid parliamentary majority in June, despite political controversy over a horrific train crash attributed to cronyism and underinvestment. Unemployment has fallen to about 10%—high by euro-zone standards but far below the crisis peak of 28%.
Mitsotakis has been banging the drum for more foreign investment. His chief economic adviser, Alex Patelis, cited the market rally in a recent newsletter and said, “There is still a lot of money to be made investing in Greece.” Foreigners have pumped €3.4 billion into Greek stocks and bonds this year, according to data through April compiled by Bloomberg. That's 77% higher than the long-term average for the period.
Much of that money has gone into government bonds, because some investors expect that much more will flow in, raising prices, once Greece regains investment-grade status. Mere readmission to indexes run by Bloomberg, the FTSE, IHS Markit and JPMorgan Chase will open the doors to what's a multitrillion-dollar investment pool.
To join investment-grade-only bond indexes, Greece needs to be a minimum of BBB- or equivalent from two of the three major rating companies. S&P Global Ratings and Fitch Ratings score it just a notch below and have reviews scheduled for Oct. 20 and Dec. 1, respectively. (The rating from Moody's is a bit lower.) Societe Generale SA estimates that could trigger some €650 million in bond market inflows. “Once it becomes investment-grade, everyone like ourselves will be able to buy it,” says Jason Davis, a portfolio manager for global rates at J.P. Morgan Asset Management. His fund's high-grade mandate means he currently can't own the debt.
Once an investment-grade ranking is won, the next step will be for equity index providers such as FTSE Russell, MSCI and S&P Dow Jones Indices to bring Greek stocks back into developed-market benchmarks. The target for that is next year or 2025. Greece was classified as an emerging market in 2013 as the equity market shrank and liquidity collapsed.
Nikolaos Porfyris, the chief operating officer at Athens Exchange Group, has been meeting with investors, analysts and index providers to identify the steps needed for the upgrade. In September they'll hold a roadshow for investors in London along with Morgan Stanley. “We are trying to increase access to the market, make it easier, cheaper,” Porfyris says. “There is interest, and we can see it.”
According to Malcolm Dorson, a portfolio manager at Global X Management, government reforms, European Union assistance funds and foreign investment inflows are like a chain reaction that's creating a “blueprint for Greek exceptionalism for the next few years.” He thinks investors don't yet recognize the shift. On a recent trip organized by an equity broker, Dorson was joined by just one other fund manager, he says. On similar trips to other emerging markets, 10 or more managers might show up.
Investors in Greece must contend with tiny markets and thin trading volumes, which can lead to volatility and make it more difficult to get a good price when buying or selling. “It's a really good story—the only issue we have is on liquidity,” says Kaspar Hense, a portfolio manager at RBC BlueBay Asset Management, speaking of the bond market. At the stock exchange, Porfyris acknowledges the need to increase overall market valuation and liquidity, but he says initial public offerings, plans to sell state-held stakes in banks and the possibility of more dual listings for overseas-traded Greek companies should help broaden the market.
Fund managers say Greece is shedding its image of a market dominated by hedge funds and adventurous small players. “More and more investors who didn't have allocations to Greece are now inquiring about it,” says Georgios Leontaris, chief investment officer for Europe, the Middle East and Africa at HSBC Private Bank Suisse. “The liquidity issues will be put behind us as more investors start looking at the asset class.” —
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