Greek Victor: Debt Relief

By DIMITRA DEFOTIS, The Barrons

Once again little old Greece, historical seat of democracy and former home of the drachma, threatens to unravel the European Union.

Polls show the leftist Syriza Party and its young, heretofore unknown leader, Alexis Tsipras, are positioned to narrowly win the Jan. 25 parliamentary election. If they do, they’ll be charged with forming a coalition government ahead of a February debt review with members of the so-called Troika–the European Commission, European Central Bank and International Monetary Fund. But the Greek party system is splintered. If Syriza wins and can’t negotiate party unity, another election could result within weeks.

The travails of Greece, still relegated to the MSCI emerging market index from its previous status among developed economies, threaten the stability of emerging European bonds and the euro. Tsipras is promoting “self reliance” for the Hellenes, backing away from pledges for a Greek exit from the euro zone.

Regardless of what a coalition government looks like, “some form of additional debt relief in the form of longer maturities and reduced interest rates” is most likely, says George Hoguet, global investment strategist at State Street Global Advisors. The Troika owns a majority of Greece’s debt. That burden stood at 322 billion euros ($371 billion) in the third quarter of 2014, or 179% of GDP.

Although investor fear subsided slightly last week, it is palpable: The yield on the 10-year Greek sovereign bond has nearly doubled from its low last September to a peak of 11% on Jan. 7, according to Tradeweb. The yield has since fallen back to 9.1% as worries about a “Grexit” diminish.

Equity investors hoping for a quick and happy postelection party should instead plan for more chaos. The Global X FTSE Greece 20 ETF (ticker: GREK), down more than 45% over the past 12 months, certainly reflects a lot of risk. But volatility is its most likely course.

A good example of Greece’s recent misfortunes is Piraeus Bank (BPIRY), whose shares had dropped more than 50% over the past 12 months because of the country’s troubles. Then last Thursday, the stock took another 6% hit after Switzerland’s central bank said that it would let its currency float–unleashing mortgage risk in Eastern European nations where some homeowners have Swiss franc-denominated loans. Piraeus’ foreign operations happen to be concentrated in Romania and Bulgaria, where it has combined assets of roughly $3.8 billion.

Longer-term–as much as five years–one private equity investor we talked to, Washington, D.C.-based Sheri Orlowitz of Artemis Holdings, thinks Greece offers some opportunities. Orlowitz traveled to Greece with the U.S. State Department last year to counsel entrepreneurs and study investment opportunities. Her conclusion: Private and public assets are sorely undervalued and worth a look–especially those that don’t rely on local markets for the bulk of their revenue but are “tarred” by Greek political complexities.

Still, if Greece leaves the euro zone, it would suffer severe economic damage short-term, before a new Greek currency improves imbalances, writes Colin Ellis, Moody’s chief credit officer for Europe, the Middle East and Africa.

There is some good news: The Greek economy actually grew during the first three quarters of 2014. It was a decent year for tourism. Here’s hoping Greece doesn’t become an island unto itself.