By: Philip MacKellar, July 19, 2023
Do you remember the Eurozone debt crisis and the era of the economic PIIGS (Portugal, Italy, Ireland, Greece and Spain)?
Between 2009 and 2016 these nations flirted with default and even expulsion from the Euro zone. Lenders panicked, driving up bond yields, and in turn capital flight and brain drain ensued. In response, governments were forced into accepting harsh bailout terms such as requiring sweeping regulatory reforms, austerity and tight fiscal targets.
In many ways, Greece was the poster child for this crisis. Its pre-2008 excess was the most extreme and post-2008 it came closer to economic collapse than any of the other PIIGS. The bailout conditions forced on Greece were harsher than those imposed on their peers, and the road to recovery has been tougher.
Naturally, as contrarian investors, many Greek securities and the GREK ETF ( GREK-A +0.43%increase ) interested us during that period. After watching and waiting for years, we took a stake in the ETF at $27.06 in 2015, and it has resided in our contrarian portfolio ever since. We opted to own the ETF over individual securities because we thought it would offer a better degree of diversification.
Unfortunately, it dropped nearly as soon as it was purchased, and then flatlined for years. Recently, however, its fortunes have changed. In 2022, it performed well compared to North American benchmarks, and this year it is on a tear, up 45.5 per cent.
There are many factors driving this rally. In mid-June, Greece re-elected conservative leader Kyriakos Mitsotakis, and his New Democracy party, with a majority government. He first came to power in 2019, and this decisive result reflects his management of the economy, government reforms and a tough foreign policy stance – especially against Turkey in the Aegean Sea.
Mr. Mitsotakis will have his work cut out for him in his second term. Though he has brought down government spending, reduced red tape, and digitized services and back-end functions of many government departments, the issues of corruption, tax evasion and judicial reform remain.
The courts, for example, are notoriously slow and inefficient. According to the European Commission’s EU Justice Scoreboard, Greek courts typically take around 700 days to conclude civil, administrative and commercial issues in the first instance. By contrast, Denmark takes less than 50 days, and most EU nations take well under 200 days.
When it comes to even starting a trial, Greece ranks second worst in the EU, taking another 700 days to hear a case. This means even simple issues can take years (on average about four years) to go to trial and reach a conclusion – assuming there is no appeal. Such timelines drive away foreign investment and leave businesses within the country in a state of purgatory.
Nevertheless, the economy is doing well, which is helping boost up the stock market. Inflation, which peaked last year in the low double digits, is down to 2.8 per cent. GDP grew 5.9 per cent in 2022. That year, Greece recorded a government budget deficit equal to 2.30 per cent of the country’s GDP, down from 9.7 per cent in 2020 and a whopping 15.2 per cent in 2009 when the Financial Crisis was in full swing.
Meanwhile, debt-to-GDP has dipped to its lowest level since 2012, at 171.4 per cent. This figure is still excessive but improved from an all-time high of 206.3 per cent in 2020. The federal government’s improved fiscal condition has brought the Greek bond market back from the brink. Since 2017, bonds have traded like a normal market, void of massive bond yield spikes, and in 2021 the government sold its first 30-year bond since 2008.
Turning to the banking sector, non-performing loans are getting better, but the rate of improvement has slowed. In the first quarter, the share of non-performing loans stood at 8.8 per cent, compared to 12.1 per cent in the prior-year quarter. This is an improvement over the 49.1 per cent recorded in late 2016 and early 2017, but is miles away from being healthy. For contrast, during the peak of the 2008 financial crisis, America’s non-performing loans were roughly 7.5 per cent. Though the Greek financial sector has come a long way, there is still a lot of ground to cover.
Finally, the Greek stock exchange is being propelled higher thanks to expanding corporate revenues and cash flows. This provides a strong tailwind for shares, especially considering the Greek stock market is still one of the least expensive globally. Compared to North American indexes, for example, it looks dirt cheap.
It would be unreasonable to expect the Greek market to achieve parity with North American benchmarks, but it is realistic to assume valuations could double from here. We see more potential upside and think the ETF could power well over the $50 mark.
Philip MacKellar is a writer for the Contra the Heard Investment Letter.