The news from the fiscal front is not encouraging, inflation shows no sign of abating, while concerns about the performance of the economy, still growing much faster than other EU countries, from the fourth quarter of 2004 onward, abound. These factors appear to have played a role in convincing many Greek individual and institutional investors not to add more local stocks to their portfolios and opt instead either to stay on the sidelines or trim their existing stock positions. They have done little, however, to sway foreign investors’ faith in the local stock market (ASE), as evidenced by their increased share in daily turnover and the bourse’s capitalization. As the Greek government seeks a debate in Parliament on the economy, more and more analysts and others speculate that any debate may reveal figures on last year’s budget deficit and GDP growth rate that could be even worse than expected. The new government has said the budget deficit ended provisionally at 2.95 percent of GDP in 2003 whereas GDP growth stood at 4.2 percent versus an initial estimate of 4.5 percent by the previous government. In addition, the retreat of the euro against the dollar and other major currencies, coupled with buoyant oil prices and the likelihood of unjustified price increases ahead of the Olympics, have compounded concerns about a pickup in inflation in the months ahead. Aware that these factors, along with likely spending overruns as the preparations for the Olympic Games approach, warrant a tougher economic policy from the fall of 2004, many risk-averse individual investors have decided to stick to safe investment instruments, such as money market products and bonds, and shun stocks. Lack of confidence in the corporate governance of local listed companies and the ability of the Capital Market Commission, the market’s watchdog, to safeguard their interests, as well as steep losses incurred after the stock market bubble burst, have added to their frustration and reinforced a conviction to stay away from the bourse even if this translates into losses in purchasing power. The typical depositor earns less than 2.0 percent net in taxes in a bank account with average inflation running at 3.5 percent. But the gap left open by local investors appears to be filled by foreign investors who have been increasing their equity stakes in Greek listed companies for some time. According to the latest official figures, foreign investors control more than 41 percent of the market capitalization of the 20 blue chips making up the FTSE/ASE-20 index. Foreign interests control a little bit more than 18 percent of the market capitalization of the 40 mid-cap companies, comprising the FTSE/ASE Mid-40 index and some 15 percent or 2.1 billion euros of the FTSE/ASE Small-Cap 80 index. Among the most well-known Greek companies, foreign investors, including mutual funds, pension funds, insurance companies and investment houses, appear to have a bigger than 28 percent stake in OTE, the telecommunications incumbent. About 30 to 35 percent of the market cap of the state lottery operator OPAP is thought to be owned by foreign players with some 5.0 percent controlled by the Funds of Fidelity. The latter also controls a 5.0 percent stake in PPC, the Public Power Corporation, with all foreign institutionals having the lion’s share in the company’s free float. Foreign funds also control between 15 and 20 percent of the market cap of the National Bank of Greece, some 21 percent in Piraeus Bank with ING owning 5.0 percent of the bank. French Credit Agricole controls some 11 percent of Commercial Bank, while Societe Generale has recently bought a 50.01 percent in General Bank. There are no estimates as to the foreign equity stake in Alpha Bank but it should be no less than 25 percent. Of course, foreign institutionals have also built up positions in other listed local companies. It is public information that the Funds of Fidelity control some 10 percent of Technical Olympic, about 5.5 percent of Folli Follie, about 5.12 percent of Intracom and 5.49 percent of CosmOTE, the mobile arm of OTE. It is known to have smaller positions in other companies. Greek investment companies have also attracted the interest of foreign hedge funds and others specializing in the sector. A fund belonging to the Deutsche Bank Group is thought to control minority stakes in a number of listed investment companies. Irish-based Laxey Investments also owns minority stakes in a few investment companies, most prominently Proodos, belonging to the EFG Eurobank Ergasias Group. So why is it that foreign entities buy what local investors shun? There is no doubt that macroeconomic factors, such as deficits and GDP growth rates, play a role but Greece’s participation in the eurozone has diminished their importance. With the budget deficit assumed to be less than 3.0 percent or even a little higher, there is little to worry about even though Greece has one of the highest debt ratios in the EU. Foreign fund managers admit in private that a GDP deficit larger than 3.0 percent is not good news but readily point out that other countries have run even larger deficits in the last few years. They also say that concerns about an economic slowdown after the Olympics may be well-founded but that even if the GDP growth eases to 3.0 percent, it will still be higher than projected in most other EU countries, excluding some of the 10 new entrants. Even so, projected Greek GDP growth rates point to satisfactory sales growth this year and next without counting the potential benefit from the Olympics. The latter appears also to have played a role in outside investors’ decisions. Some of them refer to stock markets of countries hosting the Olympic Games, emphasizing that they have done well in the Olympic year, bar Spain in 1992. Even though the country’s fast growth record and the Olympics partly explain foreign increased presence and exposure in the local stock market, it is the prospect of satisfactory earnings growth and visibility in the foreseeable future, along with some buying linked to technical reasons, namely that Greece is underweight, that has been the driving force behind beefing their stakes in local companies. There is little doubt that foreigners will not be net buyers forever. The fact that they buy, though, is a reminder to local investors that things may not be as bad as they think.