Greece may be doing poorly when it comes to FDI (Foreign Direct Investments) but it is doing well when it comes to portfolio investments. Foreign financial institutions and all kinds of foreign funds – such as pension funds, mutual funds, hedge funds – hold the biggest chunk of Greek government bonds issued to finance the budget deficit and more than 38 percent of the total market capitalization of the Athens stock exchange. This development has made more businessmen, bankers, analysts, brokers and even government officials wary of a potential mass exodus by foreign portfolio investors that would severely hurt Greek securities and undermine economic growth. They may be eventually right but it looks as if 2006 will not be that dreadful year and may have to wait even longer, especially after the country secures 20 billion euros in structural aid for the 2007-2013 period over the weekend. It is not a secret that concerns about the intentions of foreign investors have been voiced in different corners in the past but reality has proved them wrong. Non-resident banks and institutional investors have been increasing their participation in the shareholding of Greek stocks for more than two years, expressing a keen interest in the part-flotation of state-controlled companies. They also continue to be the dominant force in the secondary electronic bond market and primary issues of the Hellenic Republic. Greece has borrowed more than 30 billion euros each of the last few years to refinance expiring issues and fund its new budget needs. The prospect of many public-private partnerships (PPP) projects expected to take off in the next couple of years has provided another material incentive to foreign houses to look to Greece in a more systematic way. If one puts these factors together, he or she can understand the time resources committed by more and more large investment banks in the Greek market. It also explains the visits of high-level officials from these institutions to Greek government officials, the chairman and CEO of a number of large and mid-size but promising companies of the private and public sector. The visit by Merrill Lynch’s vice chairman Reginald Bartholomew to top Greek bakers and businessmen a few weeks ago is just an example. The visits by analysts – who are sometimes accompanied by their clients, namely fund managers – have been more frequent. The same is true with investment bankers seeking deals. To make their presence felt more intensely, some of these international investment banks, such as Morgan Stanley and Deutsche Bank, have either set up or upgraded their existing representative offices in the country in the last year and a half. Some others, like Merrill Lynch and Goldman Sachs, which do not have representative offices in Athens, have moved to beef up their analyst coverage of local listed companies and hired Greeks to fill the shoes of investment bankers, focusing on Greece, Cyprus and sometimes the greater geographical area. It is a wise choice given the problems created by the language barrier when one contacts bureaucrats at different levels of the Greek public sector and even private sector companies. With competition increasing worldwide, some of the large international firms have sought to close smaller deals than before to generate fees. This has brought them to Greece, where the lure of the huge borrowing needs, the tapping of the international capital markets by a growing list of Greek corporations, the 1.65-billion-euro privatization program of 2006 and potential M&A deals in the private sector provide a fertile ground for dealmaking and income. One may also add the commissions related to everyday trading to get a better picture. In many cases, analyst coverage goes hand-in-hand with getting a fair share of trading in a company’s stock and finally landing an investment job in the form of an M&A or flotation. Of course, the initiation of coverage of a listed company by an analyst may be due either to a recommendation from the top echelons of the firm or may be simply due to queries from clients. The increased interest in the Greek banks by foreign funds which saw the value of their holdings or their competitors’ swell during the last three years convinced the research departments of some large international investment banks to either initiate coverage or increase it. Ample liquidity in world markets has also helped solidify this relationship between Greece and foreign investors as the latter facing limited opportunities in the large US and European markets have sought opportunities elsewhere. In this context, Greece appears to be a beneficiary because it can offer them a cocktail few other Western European countries can: its vicinity to risky but promising Balkan markets and the significant presence of some Greek listed companies in that region. This has made Greece a vehicle from which to play the growth story of the greater region in the eyes of foreign funds, which are eager to obtain exposure but cannot do so via the illiquid stock markets of the neighboring countries. By buying stocks in Greek banks and other large listed companies deriving a good deal of their revenues from the greater geographical region, these «East European funds» can attain their goal. Undoubtedly, the continuous redemption of shares in domestic equity funds and the increased holdings of foreign investors justifies some concern about the behavior of the latter at some point down the road. However, judging from the performance of the Greek stock market in the last few weeks – a good period to evaluate the view of foreign funds as they start establishing positions ahead of the New Year – and the seeming improvement in the country’s public finances, there is little to suggest 2006 will be the year of an exodus by foreign investors, which is envisioned by number of local market participants. One may even argue that Greece’s securing some 20 billion euros in EU structural funds from the 2007-2013 EU budget over the weekend may postpone that feared exodus year because it helps economic growth and therefore the sales and profits of companies as well as public finances. Only a significant increase in risk aversion worldwide, probably the result of a major external shock such as oil heading to 90 dollars per barrel, could shake the confidence of foreign investors but it will be in the context of a worldwide meltdown.