Norway’s long Greece
I’m not entirely clear on what Bloomberg’s Josiane Kremer is trying to say here, on the subject of Norway’s sovereign wealth fund loading up on Greek debt:
“The point is, do you expect these guys to default?” said Harvinder Sian, senior fixed-income strategist at Royal Bank of Scotland Group Plc, in an interview. “Norway has taken the view that they will not. The Greek holdings are particularly interesting because the consensus in the market is that they will at some point restructure or default.”
Norway says its long-term perspective will protect it from losses. “One could say we are investing for infinity,” [finance minister Sigbjoern] Johnsen said in an Aug. 27 interview…
The 750 billion-euro ($962 billion) package crafted by the European Union and the IMF as speculation a euro member might default undermined the common currency “has proved successful,” Johnsen said. The IMF said in a Sept. 1 report that “current market indicators of default risk seem to reflect some market overreaction.”
The yield premiums investors demand to hold Greek, Spanish and Irish debt rather than German bunds are even wider than before the EU announced its rescue package on May 10…
Since June, the euro has strengthened 7.5 percent against the dollar, signaling investors are satisfied the EU’s measures, including stress tests on 91 of its biggest banks and liquidity support, have been effective in stemming the crisis.
It’s worth walking slowly through all this. First, is there really a market consensus that Greece is going to restructure or default? I think there probably is — but it’s not easy to tell by looking at markets, because the markets are being deliberately skewed by the ECB. If you look at the benchmark five-year government bond, it’s trading at about 70 cents on the dollar, with a coupon of 3.7%, to yield 12%. There’s clearly a significant default probability baked in there. But at the same time, if Greece does default in the next five years, anybody who bought that bond today will almost certainly end up losing money. Greece is trading very wide, but it’s not trading at distressed levels.
At the same time, having a long-term perspective doesn’t help at all. If a debtor defaults, it doesn’t matter how long your perspective is, you’re likely to lose money, and your bonds aren’t ever going to be worth what you paid for them. Unless you’re some kind of distressed/vulture investor, and Norway certainly isn’t that, default means you’re going to suffer a loss, whether you hold on to your paper or whether you sell it. End of story.
So how, exactly, has the European bailout package “proved” successful? Kremer looks at two indicators: debt spreads, which have widened out, and the euro, which has strengthened. The former, it seems to me, is a more reliable indicator than the latter: currencies move for all manner of reasons, and it’s pushing the limits of credulity to say that the euro has strengthened because the Greek bailout was a success, even as the debt market is as worried as ever about the country’s creditworthiness.
I’m also worried about the fact that the Norwegian finance minister is out there talking up his sovereign wealth fund’s book: it introduces an utterly gratuitous level of politicization to a process which should be much more disinterested. If the fund’s managers think that they can outperform their index by loading up on Greek debt, that’s fine. But let’s not turn their trading position into some kind of noble stance: it isn’t, and it shouldn’t be, either.