Greek bonds beat lottery as investors sparkle from smashed glass

The woman who died in a burning Athens bank still smiles at Giorgos Mastorakos on his way to the delicatessen he owns around the corner.

The wreaths and tributes no longer cascade onto the road to mark the spot where she and her two colleagues were killed in violence in May 2010 after the country’s unsustainable debts and ensuing financial decline resulted in the first depression since World War II. At the makeshift memorial that fewer people visit on the anniversary of the deaths, the photo of the woman’s face is framed by an anarchist sign and withering bouquets.

Mastorakos, 64, and his employees helped those who escaped the burning building. “And that’s when the questions began: Did so-and-so get out? Have you seen that person?” he said.

The anger against austerity, reflected in the broken windows of hundreds of Athens storefronts, led to political turmoil in 2011, the world’s biggest debt restructuring the following year and chaos as elections forced Greeks to choose between the euro and the drachma. Now, halfway through his term, Prime Minister Antonis Samaras sees recovery and redemption after Greece came to the brink of bankruptcy and sparked a contagion that engulfed Ireland and Portugal.

The economy will expand this year after the worst downturn in peacetime, the highest unemployment in the region has peaked and investors are buyers of Greek bonds again. The yield on benchmark 10-year government debt is 5.79 percent, down from the high of 44.2 percent in March 2012 — a return better than most winning lottery tickets.

Back to 2000

The Athens Stock Exchange index has advanced 46 percent over the past 12 months following the revolt against reductions in the safety net for the poor and government services imposed by the European Union and International Monetary Fund.

“You could almost say that Greece went through the five stages of grief,” said Andreas Koutras, an adviser at SteppenWolf Capital LLC, an investment company based in Switzerland. “Greeks passed through the initial phases of denial and anger and are now at the depression and acceptance of the inevitable.”

Greece was re-designated an emerging market last year for investors, status it had shed when the country headed toward euro membership. Confidence has returned so strongly that during the past month investors favored Greece more than any peer, according to data compiled by Bloomberg.

Greek bonds returned 309 percent since March 2012, based on the Bloomberg Greece Sovereign Bond Index. Lottery operator Opap SA pays out about 67 percent of its revenue in winnings. As yields tumbled, so did the cost of insuring against the country reneging on its debts. Credit-default swaps, which paid out with the debt restructuring, are the cheapest since 2010.

Buying bonds

Jupiter Asset Management in London is among the buyers of Greek debt, investing first in the second half of last year and adding to its holding in recent months. The company participated in Greece’s 3 billion-euro ($4.1 billion) sale of five-year bonds in April, which ended the country’s exile from markets.

“With regards to other emerging-market economies, Greece is unique as it is part of a currency union with the rest of Europe,” Ariel Bezalel, who manages the 2.1 billion-pound ($3.6 billion) Jupiter Strategic Bond Fund, said by e-mail this week. “Investors view Greek government bonds as an opportunity to invest at the beginning of a multi-year turnaround and deleveraging story.”

A U.S.-based exchange-traded fund, or ETF, tied to Greece has grown 30 percent since the beginning of June, the biggest increase than any other country ETF with a minimum value of $100 million, according to data compiled by Bloomberg.

ETF inflows

Greece is now at a 57 percent premium to other emerging markets, having rebounded from a discount of 55 percent in 2008. Shares outstanding in the ETF, a proxy of the inflows, show the most shares created ever this month, while comparable data for an emerging market-focused ETF points to more fluctuations in the money going in and out of the fund.

The biggest investor in the Greek ETF is Glovista Investments LLC, a money manager based in Jersey City, New Jersey, holding 9.6 percent of the fund, filings show.

The investment reflects belief in the “cyclical upswing” across the euro region and the cheapness of Greece relative to other markets, Darshan Bhatt, who co-founded Glovista in 2007, said by e-mail. Among the turning points were “the strong popular support throughout the deepest phases of the country’s crisis towards permanence in the euro,” he said.

To get there, the leaders of what were the two main political parties in Greece for decades swapped roles as pariah and savior while the doomsayers of the euro were ultimately debunked.

Global attention

The crisis was to bring about one of the biggest collapses of any party system in western Europe since 1945, propelling a little-known party called Syriza and its leader, 39-year-old Alexis Tsipras, to global attention and making him the face of the revolt against German-imposed austerity as Samaras was depicted as its defender. That new order in Greece, along with the fault lines dividing the euro region, was cemented last month in European Parliamentary elections.

“Three years ago when you talked to policy makers no one would allow you to finish a sentence starting ‘the euro is a flawed project,’’ said Riccardo Barbieri, the London-based chief European economist at Mizuho International Plc, who wrote research reports on Greece in the four years before the nation adopted the euro in 2001. ‘‘Today, you say let’s start from the premise that this has been a very flawed project and we’re now dealing with the consequences and trying to fix it.”

Plot twists

Like all dramas, there are plot twists that became pivotal moments and, with this one, the ending isn’t yet assured.

For the Greeks, it began with another bond offering, sold in 2000 before their country joined the club of nations using the euro. A decade later, unable to repay that security, the government sought unprecedented help from its European partners.

“We reached rock bottom and now we can only go up and we will only go up,” said Samaras, 63, in an interview at his office in Athens in April.

If Samaras’s election victory at the second try two years ago marked the turning point for the nation’s ability to retain its place in the euro, it was the first round of austerity in May 2010 when the doubts began.

The measures to secure an initial bailout led to almost 1 million Greeks becoming unemployed, a quarter of the country’s economy — at least 50 billion euros — disappearing, and Greece facing default. They also sparked the riot that led to the Athenian bank being torched, trapping the workers inside and leading to the three deaths.

Papandreou’s Odyssey

It was the beginning of what then-Prime Minister George Papandreou called a “new Odyssey.” By 2012, Papandreou had been replaced by interim Prime Minister Lucas Papademos, a former European Central Bank vice president charged with uniting parliament behind the steps necessary to keep the aid flowing.

On the evening of Feb. 12, a Sunday, as Papademos fought for approval for the newest package of cuts to secure aid, rioting broke out in Athens and other cities.

More than 100,000 protesters converged on parliament in Syntagma Square, the plaza that had over the previous two years come to symbolize the popular revolt against the measures to keep Greece in the euro. The riot destroyed more businesses in the same downtown city block in which the woman in the bank died. Much of it remains shrouded by corrugated fencing.

It was the night Mastorakos lost his store.

Fire trucks put out the last of the blazes the next day, including to the Attikon cinema neighboring his delicatessen. The cinema had survived the Nazi occupation of Athens only to be gutted by the fury of the rioters. Mastorakos said he couldn’t get close to the building for the heat.

“I just stood there and watched it burn down,” he said.

Hydra’s head

With 14.5 billion euros of debt to be repaid a month away, EU leaders were weary of Greece’s feuding parties and broken promises. Finance Minister Evangelos Venizelos went back and forth with Greece’s bailout masters, talks he had already called a “Hydra’s head,” a reference to the monster of myth that grew more heads for each one cut off.

Samaras, leader of the opposition New Democracy party, rebuffed Papandreou’s overtures to build cross-party support twice in the previous year, even though they were together as students at Amherst College in Massachusetts in the early 1970s. Now Samaras insisted that Papademos secure the aid and debt swap and then step aside for elections.

When Samaras refused to sign a written pledge on budget cuts, European Commission President Jose Barroso told him to quit playing “political games.”

Taking losses

The green light for the swap to shave 100 billion euros off more than 200 billion euros of privately held debt was given on Feb. 21 to avert a default. A deadline to accept the terms was set for March 8. The next day Greece pushed through the restructuring. In the wake of the swap, the ECB, euro region governments and IMF owned 73 percent of Greek debt.

Papademos told Greeks to reflect on the mistakes that led to the losses. Work must continue to safeguard the country’s place in the euro, he said. Elections were called for May 6.

Unemployment among youth had surpassed Spain’s, with more than half without a job. Pensions had been cut and property taxes increased. Polls showed 9 in 10 Greeks were pessimistic about their future. Support for New Democracy and Pasok slumped to the lowest since the military junta ended in 1974.

In April 2012, a 77-year-old retired pharmacist took the metro line to Syntagma, sat under a tree and shot himself. In his suicide note, he mentioned the prospect of having to dig through trash to eat.

Close result

At the end of the month, Mastorakos reopened with the help of an insurance payout in premises vacated after the fires by Citigroup Inc. The century-old delicatessen he and his son own, Vasilopoulos Bros., was resurrected. On the mezzanine level, Mastorakos hung the reframed poster from 1907 saved from the wreckage of the February fire.

As election results came in on the evening of May 6, the tally showed that even together New Democracy and Pasok didn’t have a majority in parliament. Tsipras led anti-bailout Syriza to within 130,000 votes of placing first.

With lenders waiting to hear in June how Greece would deliver 11.6 billion euros of savings for 2013 and 2014 to revive an aid plan, Tsipras declared he had enough support to call for a cancellation of the bailout.

Samaras set the terms of the debate that would follow in the days and weeks to come: Stability or Syriza, euro or drachma. Greeks would be going to the polls again on June 17.

“He came out the next day and said it’s now light against darkness,” said George Papaconstantinou, finance minister from when Papandreou won power in October 2009 until June 2011. “And he set the second election in very, very stark terms. He quickly saw that the only way to survive was to set up this euro or drachma conundrum and he did it very quickly.”

Golden Dawn

Between the elections, state asset sales were halted, deposits flew out of banks and aid was frozen again. Greece hung in the balance, and Tsipras wasn’t the only new political force.

The anti-immigrant Golden Dawn with its stiff-armed Nazi salutes and red, white and black logo had entered parliament for the first time. One of its members, Ilias Kasiadaris, attacked two rival women lawmakers on television in what would be called in Greece the slap heard around the world.

In the end, Samaras added 10 percentage points to his May result, maintaining his lead. So did Syriza, who would remain his biggest challenger and ultimately placed first in Greece in last month’s elections to the European Parliament while newly formed parties such as To Potami also won support.

“In 2012, we had an anger vote and disillusionment,” Koutras, the investment adviser, said from his office in London. “This is still the case, but with a glimpse of hope that the electorate is willing to try new ventures.”

Playing Germany

As Greece stepped back from the brink, European finance ministers indicated a willingness to adjust the terms of the country’s bailout package as long as a new government in Athens “swiftly” emerged. On June 20, Samaras was sworn in as the head of coalition government with Pasok, which finished third, and Democratic Left, to hold 179 of the 300 parliament seats.

Two days later, Greeks hopeful of a victory against Germany on the soccer pitch gathered in open-air squares around the country to watch the national team play in the European Championships, a competition it had won in 2004. Cheered on by Merkel, Germany conquered Greece 4-2.

It would take another two years before Greek fans could celebrate, this week making it through to the second round of the World Cup for the first time in the team’s history.

On July 26, 2012, Barroso, the first senior EU official to visit Athens in more than a year, urged Samaras to make good on promises and “deliver, deliver, deliver.”

Draghi’s speech

Finance Minister Yannis Stournaras met with the bailout officials to secure more time to implement reforms, while Samaras’s coalition partners were hesitant over the cuts. Citigroup Inc. said the likelihood Greece would leave the euro in the next 12 to 18 months was 90 percent.

The same day, the clearest voice came from European Central Bank President Mario Draghi, who said in a speech in London he was ready “to do whatever it takes to preserve the euro,” sparking a global rally that carried through into this year.

The phrase would be echoed by Merkel again in August when Samaras made his first official visit as premier to Berlin. Merkel admonished lawmakers from her coalition who said Greece should quit the euro, telling them to “weigh their words very carefully.” Samaras complained the “cacophony” of speculation about an exit has made delivering more difficult.

“The cautiousness and indecision on behalf of our European partners that cost Greece a lot in 2010 in terms of delay saved Greece in 2012,” said Papaconstantinou, who is facing prosecution for allegedly removing relatives from a list of tax evaders, a charge he denies, arguing that he is being used as a scapegoat.

Merkel reward

Merkel ignored demonstrations to visit the Greek capital in October, repaying Samaras’s commitment to following German rules. In November, EU governments agreed to cut rates on loans, suspend interest payments for a decade and give the nation more time to repay and meet deficit targets. Greece carried out a bond buyback, clinching the release of 34 billion euros of frozen funds. Samaras was promised more debt relief if he stayed the course.

Finance ministers spent just 10 minutes on Jan. 22, 2013, before signing off on another aid installment, the latest indication the prime minister was the Greek they were banking on to succeed in helping keep their currency intact. On May 22, Citigroup dropped a Greek euro exit from its base-case scenario.

That’s roughly when Stelios Papadopoulos, the head of Greece’s debt agency, started his campaign to get the world to change its perception of Greece. And on a cool spring day in Athens in April this year, he entered the final stretch.

Narrative change

On the eve of Merkel’s second visit to Samaras in Athens, he sold the Greek five-year bonds to the likes of Jupiter and other investors. Bids topped 20 billion euros.

It was reward for the former BNP Paribas SA banker persuading investors they should buy bonds from a country whose debt was 175 percent of its economy, the most in the euro area, even after the biggest debt restructuring in history. The losses for bondholders in 2012 had become part of the sales pitch.

“The story was very unique,” Papadopoulos said. “You needed to unveil a completely different narrative. Greece’s economic future, not its past, was the main selling point.”

In the final, most important stretch of what he called a relay race, Samaras picked up the baton in New York where he met with bankers from JPMorgan Chase & Co. and Goldman Sachs Inc.

The combination of a budget surplus before interest payments, the conclusion of the longest-ever review by the inspectors overseeing the bailout and the debt sale allowed Samaras to claim the recovery was well on the way when Merkel visited Athens again, this time to “peer into the future.”

More subdued

While Greeks living through the seventh year of economic decline showed in May’s European elections they were less convinced, the rhetoric is less firebrand. Tsipras has tempered his criticism of the euro and even met with Draghi on June 10 to press home his argument for a debt cut.

At his delicatessen selling imported goods such as curry paste and coconut milk, Mastorakos is still unsure.

Custom was scant over the traditionally busy Christmas period until a last-minute rush boosted sales, he said. Shoppers navigate the sidewalk of gutted buildings blackened by soot to get to the new store. A billboard on the memorial to the dead bank workers indicates the neoclassical building is set to be restored. Across the road, a young man sleeps in a doorway with his hand around a paper cup to collect change from passersby.

The situation “is more stable, but subdued,” Mastorakos said. “I believe we can keep going. I’m certain there must be light at the end of the tunnel. When? I can’t tell you.” [Bloomberg]