Despite forecasts to the contrary, Greek retail investors have largely remained loyal to local securities – stocks, bonds and money market instruments. However, the physical introduction of the euro, the increasing degree of integration among national EMU (Economic and Monetary Union) markets and the quest for higher returns are likely to persuade them to invest a greater portion of their money abroad. This is likely to accelerate the process of consolidation, especially in the local brokerage and mutual fund industries. However, the effect on the Athens bourse is not easily discernible at this point although most market pundits side with the pessimists. Although there is no official data available on purchases of foreign stocks, bonds and money market products by Greek individual investors in 2001, the local mutual fund industry sheds some light on local investors’ appetite for foreign securities or other products. The figures show a huge net increase in sales of units of foreign and international bond funds, which are managed by Greek mutual fund companies (AEDAK) and invested in foreign securities in 2001. Nevertheless, the big net increase in these funds’ units in the order of 110.01 percent and 346.94 percent respectively for each bond category reflects a number of factors: first, local residents’ preference for more conservative investments following two consecutive years of steep equity drops. Secondly, bonds performed well in 2001, and thirdly, there is a willingness to take some additional risk to enhance returns while remaining in the same mutual fund class, that is, bond funds. On the other hand, units of foreign equity mutual funds sold rose by a mere 2.54 percent while they fell slightly by 0.55 percent in the international equity fund category. The picture was mixed in the money market fund class as international money market funds’ units rose 32.17 percent while foreign funds’ units fell by 20.86 percent. All in all, the relatively small market share by foreign and international mutual funds in their respective broad classes is indicative of local retail investors’ unwillingness to sail into unknown waters up to now and partly explains the huge amounts of money parked in repos (repurchase agreements). However, the imposition of a 7-percent tax on interest earned on repos from the beginning of 2002 is likely to make more Greeks rethink their investment strategy, perhaps leading them to put more money in foreign securities. Some market participants believe the process of international portfolio investing in Greece has already started and will pick up steam in the coming months and years to reach, albeit at a slow pace, levels seen in other small European countries such as Portugal. They point out that the current 20-percent withholding tax on capital gains earned by local residents when they invest in units of foreign funds domiciled outside Greece will not be there for long to shield the local industry. Some local brokerages seem to have come to the same conclusion and have rushed to become members of foreign bourses, develop ties with European brokerage associations and upgrade the services on international equity investments offered to their retail and institutional local clients. Faced with a stagnant Athens bourse, characterized by low trading volumes, these firms have marketed aggressively foreign equities to their clients but the degree of response does not seem particularly satisfactory in those cases that we are aware of. As more and more of their clients seek to diversify their portfolios by directly investing in foreign equities, brokerages are more likely to feel the pressure to merge, given the large sums needed for investment in order to radically improve the execution of client orders, the quality of analyses and other services so that they can compete with their foreign rivals. This pressure on the brokerage firms is likely to become more acute if part of the net outflows linked to the expected portfolio shift emanate from the liquidity-thirsty Athens bourse. It is well known that foreign funds have played a major role in giving direction to the Athens stock market. For example, last June’s net outflows led to the stock market’s severe downturn. In this respect, a net outflow on the back of local residents’ search for international portfolio diversification is likely to cause problems. It is correct to consider the process of international portfolio diversification by local residents inevitable. It is also correct to say this dynamic process is likely to contribute to the restructuring of the local brokerage and mutual fund industries. However, it is not correct to say this process will be necessarily bad for the Athens bourse. If, indeed, it results in net outflows from Greek equities, this will hurt the bourse but the move might give listed companies another reason to shape up. If, on the other hand, the prospects of listed companies brighten to reflect the growth prospects for the Greek economy in the next few years, there is good reason to expect locals to invest more funds in their shares, even as they diversify their portfolios, and for foreign funds to change their tune and buy into them.