Norway’s long Greece
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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.
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Funny, I didn’t know that Greece issued Consols. Maybe it only sells them to Norway.
If Greece offers 15y bonds for its 5y bonds, it may be a settlement bordering on default and a disaster for many bondholders, but Norway with its “infinite” investment horizon is sitting pretty!
If I actually wanted to try to make sense of this, I would guess that he thinks “long-term perspective” is a proxy for “risk-tolerant”; if you think the current price is somewhat below some sort of “expected NPV”, you’d still avoid them if you’re particularly risk-averse, but you’d buy them if you’re not. The shape of bond risk, though, with the limited upside and steep downside, argues against building a huge position, no matter how risk-tolerant you are, unless you’re awfully confident it’s going to turn out okay.
With a 12% Yield there’s a lot of room for a partial default not being too problematic, especially since there’s likely to be a currency appreciation. The Norwegians may not be taking such a gamble as it may seem, although it’s still a gamble. Let’s face it, if you could have taken a stance in emerging markets debt with Yields of 11% more than bank rates a decade ago, but in a currency that is almost a reference currency, and in a politico-economic zone supported by the power of the Bundesbank and the ECB you’d have probably bitten someone’s hand off.
Maybe the Norwegians are shooting the moon here in the hopes of making back all the money the lost on U.S. subprime.
For Greece there are really only two options: default now or default later.
http://www.polycapitalist.com/2010/09/sh ould-greece-ireland-etc-default-now.html
Excellent piece, this. I too wondered (a) what Norway was up to and (b) why the investment was so heavily pr’d in the media.
I have some evidence (not enough yet) that this is a set-up, in which Norway’s investment is a cover for ECB action to shore up Greek bonds. Hey – if they’re selling the citizen’s pensions to shore up bonds in Spain, anything is possible.
I think from my soundings that there IS a growing consensus for Athenian collapse – but an even stronger one for further debt problems elsewhere in the EU. Spain is the key suspect here, followed by Italy.
http://nbyslog.blogspot.com/2010/09/anal ysis-why-i-am-revolutionary.html
I think the story is all wrong. Norway follows an index, but make some active management around the index. At year end 2009 Norway was underweight Greece compared to the index. In June, Greece was downgraded and fell out of the index. But Norway did not immediately sell, but keeps holding part or all of the previous exposure. So now Norway is overweight Greece compared to the index, but it is the same holding as before the Greece downgrade. The fund only disclose the exact exposure at year end.
To understand this you must know things about Greece. I did research as an socialantropologist on Greece. Common people doesnt like the state in greece. They are entrepenoers and the islands have served them well since the they became part of the ECC and got a strong currency and automaticly raised prices much higher and had a convertible currency. Much of the EU money has gone to create a infrastructure for the tourist industri. But much of the industry is privatly owned. Greek businessmen dont like to pay tax and do almost anything to avoid that. But like France and Sweden the control is very hard. Unlike countries like italy or spain who has almost no control of whom pay or not. The individual family in Greece is relativly well off and owns different business but the goverment debt is totally out of control. And the IMF austerity measures taken are as always just destructive and lowers the possibility to tax and are selling greek goverment owned property and enterprices to cover the morgages and the intrestrates which are austronomous. Greece will default and will be kicked out of the EU. This will not have any enourmous effect on the greek people but for the German banks who put up the loans and for the Euro the story is different. This will mean that the euro looses further value and on top of that very angry Germans. The beautiful islands of greece will once again be more cheap for vacation when they are back on the drachmer and somehow that was when I spent time in greece. When it was cheap. Today everything is on much higher standard so it will not be like in the good old days. Cheaper Euro and Old school greece. Is democracy good when a country delibratly has a strategy of using global subsides to increase its own wealth when its not a third world country. If I were a swede or a german I would immediatly get of the EU.