Foreigners bet on better days

The international competitiveness of the Greek economy may be deteriorating but this does not seem to bother foreign investors who are lining up to buy stocks and government bonds, betting on better days ahead. Greece is a laggard in attracting foreign direct investments (FDI) on an international scale but it is doing much better in portfolio investments. It is noted that Greece ranked 23rd among the EU-25 in FDI investments in 2005, the last available year, according to the relevant report of the UN’s Conference on Trade and Development (UNCTAD). It attracted a little bit more than -600 million in 2005 and although the sum is likely to show a big increase in 2006, it is doubtful whether it will be able to become a prime destination for international corporations looking to expand abroad. Neighboring countries such as EU newcomers Bulgaria and Romania have been doing much better than Greece on this front in the last few years while Turkey has surpassed all of them. But Greece’s failure to lure FDI flows has been met by a big success in attracting foreign money to invest in its government bonds and stocks. Recently, the Greek state was able to attract much more than it hoped for its new 30-year benchmark government bond, yielding 37.5 basis points over Germany’s bond. Some attributed this development to international investors’ thirst for a yield pickup at a time when liquidity is abundant. Others were more inclined to attribute it to the improvement in the country’s fiscal accounts, irrespective of the likely upward revision of the gross domestic product by 25 percent before this year is over. The upward revision is bound to drive the budget-to-GDP ratio below 2.0 percent in 2007 and reduce the public debt-to-GDP ratio below 90 percent, improving drastically Greece’s fiscal image. Already, Moody’s, the international credit agency, has revised the outlook for Greece’s long-term debt to positive from neutral while maintaining its A1 rating. On the other hand, the more conservative Standard & Poor’s (S&P) has not budged, keeping the country’s foreign currency debt unchanged at «A,» the lowest in the eurozone. Moreover, S&P has issued a warning, citing Greece’s huge current account deficit and future pension liabilities. Usually, markets tend to discount future developments faster than international credit agencies, which tend to follow, and in this regard a tighter yield spread over Germany signals a prospective upgrade by Moody’s, S&P and Fitch Ratings, implying lower interest cost for the state in servicing its public debt. According to different sources, perhaps more than 70 percent of Greece’s public debt is in foreign hands. This means Greece is affected more by events in international debt markets in addition to fiscal developments at home. For foreign fixed income investors to be willing to buy tens of billions of euros of Greek debt securities means both they have cash and they see something positive ahead. If it were just the liquidity, they could have demanded much higher yields to compensate for the higher risk or just take their money somewhere else. However, its is not just the debt market which sends positive signals about the willingness of foreign financial investors to trust the Greek economy. The same has been happening in the local stock market in the last few years, where Greek retail and institutional investors are net sellers and foreign portfolios are net buyers, providing the necessary impetus to send the Athens bourse to levels last seen in the first quarter of 2000. Inflows into the Athens bourse from abroad surpassed the -5.0 billion mark in 2006. Executives of listed companies on the Athens Stock Exchange, stock brokers and analysts who either receive or accompany representatives of foreign funds visiting Athens are talking about a wave of company visits they have never experienced before. This trend appears to be touching more and more companies of smaller capitalizations they would have just brushed aside a few years ago. This may explain why the Athens General Stock Index and other main stock indices have registered gains in all past six weeks since the beginning of the year. According to MSCI-Barra indices, the Athens Stock Exchange ranks first with a 9.5 percent return among all developed markets since the beginning of 2007. Greece was in the 14th place among 22 developed markets last year with a return of 17.7 percent. The hefty returns earned by foreign investors who dared to invest first in the small Greek stock market has something to do with it as the quest for outperformance is always present when it comes to fund managers who know the meaning of bonuses. Also, investment bankers seeking advisory roles or underwriting mandates in privatizations and private placements by the Greek state and corporate activities (M&A) by privately owned businesses have also every reason to convince their colleagues in other departments about the value of the Greek companies of interest, leading to the initiation of analyst coverage. This introduces the companies in question to a wider group of foreign investors with all positive implications. Even so, foreign investors would not have heavily invested in a small stock market if they did not believe in the good earnings prospects of its companies. After all, this is what they are after. Whether these prospects are linked to the Greek firms’ expansion in the Balkans and the greater geographical region has more to do with the nature of foreign funds, i.e. emerging market funds or East European funds, than anything else. Undoubtedly, ample liquidity in world capital markets and rising stock prices have played a role in seeing foreign investors buying more Greek bonds and stocks. However, this by itself does not explain why the country has seen huge portfolio inflows by foreign investors at the time FDI inflows lag and the economy’s international competitiveness deteriorates. Perhaps, the shorter investment horizon of financial investors compared to international corporations doing productive investments for the long haul is the answer. Even so, the willingness of foreign financial investors to vote with their money on the prospects of the Greek companies and public finances is a welcome sign.