«The Olympics were a very significant event for Greece – not only about what Greece showed the world it could do, but it had a tremendous impact on the confidence of Greeks.» The meeting with Steve Newhouse, president of American investment bank Morgan Stanley, offered a pleasant surprise, as he was informed in depth about Greek affairs, despite heading a company of that size across the Atlantic. He first came to Greece 32 years ago, and tends to return often, both for business and pleasure. After all, Morgan Stanley last month opened an Athens branch, headed by Panos Goutakis. «Greece is a good market for us. We have a good reputation here, we have many friends here, we have many important clients here and, more importantly, we have a lot of conviction in the potential of this market.» He also explained that his bank views Greece as a launching pad for all of Southeast Europe: «It is a big and very new market.» «Changes in Athens are very significant as a place to do business,» says the head of Morgan Stanley. «I think the dividends Greece will get from this last couple of years are to be very long-lasting and very significant. I know they are expensive and caused some real challenges to the fiscal situation but I think in the end, they will prove a good investment.» Referring to the Greek stock market, Newhouse said that «the future of the equity markets will depend on getting that broader interest outside the home market in Greek companies that are performing well and growing because of regional opportunities.» He admits that «Greek individual investors are still trying to recover from the shock of the stock market problems.» A crucial issue is how mid-cap companies will attract international investors: «The problem with the mid-cap companies in general is that for major international investors, they cannot take a strong enough position. And if one does, there is no liquidity, so he has a position he cannot manage. He wants to sell it and it takes six months, one year.» In fact, the Balkans «provide opportunities for those mid-cap companies to become larger companies» and get onto the radar screen of international investors. But «another way is through structuring of vehicles that may have five or 10 or 15 of these mid-cap companies, which would provide a greater opportunity to get exposed to maybe some industry, some group of companies, that have a particular exposure to Bulgaria or Romania etc. – mutual funds, closed-end investment companies. I am not saying that these things are the answer,» he clarifies. Debt is the priority On macroeconomic issues, Newhouse stresses that priority should rest in reducing public debt. «Greece’s debt burden as a percentage of GDP is too high; it has to come down over a period of time. So fiscal discipline is required,» he said, explaining that interest rates are low now and spreads in other eurozone countries are very tight due to high liquidity in the market. Greece is therefore taking advantage of the coincidence having a low cost in paying its debt and is not «punished» for pressures its credit ranking receives after the fiscal audit. «But those things happen in cycles. So when interest rates begin to move up again and when spreads widen, the differentiation that takes place between credits can become very expensive.» The debt can be brought down «through fiscal discipline and through raising revenue in other ways, for example, by privatizations. There is still work to be done in privatizations. And we have demonstrated that there is tremendous interest in those privatizations from international investors.» Internal conflict of interests The issue of conflict of interest between research sections on the one side and investment banking and consulting sections on the other is also a thorny one. How could a bank’s analyst write a negative report on a company that entered the stock market using the same bank? «It is a very complicated issue. The best research in the world, the highest-quality research comes from the integrated securities companies, in other words, those who have these conflicts,» says the American banker. «The small boutiques usually don’t provide full coverage and important investors won’t pay them directly for research. So the vehicle of the integrated securities firms was a way for investors to get high-quality research and pay for it through a number of transactions, by doing trades, through doing new issues, etc.» «What we are struggling with now in the US under the settlement the research firms had is how we are to have quality research without having someone pay for it,» Newhouse explains, adding that now the investment banks are paying for it for a few more years, as part of the settlement. «But ultimately somebody has to pay for it. Either it is going to be the investors or the investment banks.» Newhouse is proud that Morgan Stanley has never been accused of producing research it did not believe to be accurate or was unsubstantiated by facts. «In all that, there were only two firms not accused of that, Morgan Stanley and JP Morgan. So we believe we managed those conflicts that always existed very well and we produced high-quality objective research. Now the challenge will be under new regulations to provide that same high-quality research via independent vehicles, for example. It’s very difficult,» he comments. «I think it’s impossible to eliminate conflicts. That shouldn’t be the objective; it should be to have them managed in a way that is fair and transparent and that deals in a way that your clients’ interests are not damaged.» After all, he says, if you don’t manage it well, your reputation – which is the most valuable asset – will be lost. What else must be done for Greek economy? «I get on thin ice when I start talking about the restructuring that Greece is challenged with to become competitive. Labor flexibility is a challenge for all of Europe,» says Newhouse, «a difficult challenge, because, correctly, the importance of job security is a very high priority. So [one must] find the balance to make Greece competitive in the things it does best. There are no single answers to these challenges.» «Greeks tend to see the world as a glass half empty, I do it too because I am Irish[-American]. But I think it clearly exceeded everybody’s expectations,» concludes Morgan Stanley’s president, speaking again of the success of the Games.