Greece
10 May 2011
Greece has had a rough time of it in recent years, but this is creating strong opportunities for the global players
Image: Shutterstock
With the possible exception of Iceland, Greece has suffered the most as a result of the financial crisis - although, perhaps suffered is the wrong word, as many experts feel the governments of the past decade or so have brought the problems on to themselves.
When the country became the 12th member of the euro community in 2001, the authorities promised they had instituted a range of financial reforms that they said brought the economy in line with that of the other nations using the currency. But within three years, the cracks started to appear, and analysts realised that Greece had never met the conditions for euro entry - the government then admitted the deficit had never been below the three per cent threshold since 1999, as was the rule for euro entry. This news led to a number of austerity measures in 2005, although in part this was to help the country pay for the huge costs of the 2004 Olympics.
All seemed well for a couple of years, the economy grew and industry thrived. But the respite was short-lived. By 2009, the economy was contracting and the national debt had risen by over a third in five years. The new government expected the deficit to hit six per cent and new prime minister George Papandreou described the Greek economy as being in ‘intensive care’. Finance ministers across the eurozone expressed concern about the rising debt, and credit agencies cut Greece’s rating, exacerbating the crisis by pushing up the cost of borrowing.
Throughout the end of 2009 and the beginning of 2010, the government attempted to make good the economy, but the plans were hit by a wave of national strikes as tens of thousands of Greeks lost their jobs at the same time as prices for life’s essentials rose dramatically. Despite television appeals for unity, the strikes continued, often leading to violence.
While the rest of Europe looked on in alarm, most nations were at that point not prepared to bail Greece out. German Chancellor Angela Merkel said the problems were Greece’s to solve, and there was no real plan within the European Union for what to do if a country within the eurozone were to default. The blame for the crisis then moved to the banks, who were having a pretty tough time with their reputation globally anyway. The US Fed started an enquiry into whether Goldman Sachs helped hide the scale of the Greek government’s borrowing by using derivatives contracts, and the prime minister called for a crackdown on speculators.
Finally, in April 2010, Greece asked for, and was given, international financial support. The eurozone countries provided EUR30 billion, with the IMF adding a further EUR15 billion. But even this wasn’t enough, the country’s credit rating was downgraded to junk status by Standard & Poor’s, and a final rescue package totalling around EUR110 billion was agreed by the EC, IMF and European Central Bank in May last year.
So, problem solved? Well, not really. Within Greece, there was a huge outpouring of public anger at the scale of the cutbacks Greece had to implement, and as unemployment rose, state revenues fell while costs increased. The global downturn also hit Greece hard, with fewer tourists contributing to the country’s coffers and shipping - another one of the country’s major industries - losing ground to Asian providers.
So although the focus now may be on Ireland and Portugal, as well as other shaky countries within the EU - and of course the huge debts the US and UK have run up - Greece is certainly not out of the mire. Many commentators predict the country will have to default on its debts to get its economy under control, pushing the cost of borrowing up even higher. And there remains anger that - unlike Ireland, Portugal and others, which were the victims of both mismanagement and circumstances - the Greek authorities simply lied about their economy. While unlikely, some anti-federalists believe the Greek crisis could bring down the whole euro project. More realistically, Greece may have to withdraw from the single currency, which would have huge ramifications both internationally and domestically.
Securities lending
So how does this affect securities lending? Short selling was banned for a couple of months at the height of the crisis, but the restrictions have since been lifted - naked short selling remains forbidden, however.
During the sovereign debt crisis, the local repo market seized up as investors grew increasingly concerned about counterparty risk and the likelihood of default by the Greek government. This left many holders of government securities stranded. At the end of last year, the European Repo Council unveiled a number of suggestions for getting the market moving again. These included:
A standing repo facility for primary dealers at the Greek debt management office (PDMA) or Bank of Greece along the lines of the facilities offered by the debt management agencies in Belgium, Netherlands, Portugal and the UK, lending temporary issues of securities which are scarce in the market (phantom/synthetic bonds). This would relieve the illiquidity of the Greek market and remove the need for the forced auction. An alternative in the form of a bond exchange was also mooted.
Interposing a CCP in a reformed daily repo auction to clear unsettled short positions. However, as credit issues would prevent Greek banks gaining access to an existing CCP, it was suggested that the PDMA act as a credit intermediary. Market users appeared to be willing to accept Greek sovereign risk in order to resolve settlement problems. It was generally accepted that the implicit borrowing fee needed to be high, in order to attract securities lenders (repo sellers), but only if the fee was capped and not disproportionate (in contrast to the forced auction). Initial suggestions were for a fee of 5-10 per cent.
Encouraging the ECB to recycle the Greek government securities that it is holding back into the market (while recognising that the ECB only has the power to recycle the securities that it has purchased since May 2010).
Maybe because they had other worries on their hands, the Greek authorities have so far been slow to act. The ERC is still waiting to hear if any of the proposals have been submitted to the country’s parliament, and the difficulties remain.
So that’s the bad news. But for the international players in the securities lending field, there has been huge opportunity. Because the Greek banks - regardless of their financial strength - have been tarred by the same brush as their government, investors are looking to those providers from outside the country to carry out their transactions.
At the height of the crisis last year, Citi launched agency securities lending in the country. J.P. Morgan has been in the market since 2008 and has picked up several new clients over the past year or so, while other major European and international banks also have a significant presence. “If you want a securities lending programme in Greece at the moment, you don’t go to the locals any more,” says one fund manager. “You go to the multinationals. They have the same levels of expertise, but they also have the global reach, which means access to more liquidity and reduced risk.”
According to Data Explorers, the volume of Greek government bonds owned by funds that permit securities lending is a bellwether for institutional ownership. The data shows that these funds went as underweight (compared to their benchmark) as they could or sold their holdings entirely, mainly during the April to July period last year, when the first bail out took place. Until very recently, there was little movement. In the last few days their holdings of Greek Government debt dipped below USD 8 billion for the first time.
Clearly, mutual funds are negative on the outlook for Greek debt overall and have sought to deploy their funds elsewhere. It is interesting to note that short sellers are not active, with demand to borrow Greek sovereign debt trending lower. This is not a short selling story.
Data Explorers focused on the standout mover, the 3.9 per cent 20 August 2011 issue (ISIN:GR0114019442). A recent spike in the demand to borrow this issue means that a record USD 300 million is borrowed while the institutional ownership fell significantly in late January. Some people are presumably forecasting that Greece will struggle to redeem this bond given how close we are to its final maturity.
When the country became the 12th member of the euro community in 2001, the authorities promised they had instituted a range of financial reforms that they said brought the economy in line with that of the other nations using the currency. But within three years, the cracks started to appear, and analysts realised that Greece had never met the conditions for euro entry - the government then admitted the deficit had never been below the three per cent threshold since 1999, as was the rule for euro entry. This news led to a number of austerity measures in 2005, although in part this was to help the country pay for the huge costs of the 2004 Olympics.
All seemed well for a couple of years, the economy grew and industry thrived. But the respite was short-lived. By 2009, the economy was contracting and the national debt had risen by over a third in five years. The new government expected the deficit to hit six per cent and new prime minister George Papandreou described the Greek economy as being in ‘intensive care’. Finance ministers across the eurozone expressed concern about the rising debt, and credit agencies cut Greece’s rating, exacerbating the crisis by pushing up the cost of borrowing.
Throughout the end of 2009 and the beginning of 2010, the government attempted to make good the economy, but the plans were hit by a wave of national strikes as tens of thousands of Greeks lost their jobs at the same time as prices for life’s essentials rose dramatically. Despite television appeals for unity, the strikes continued, often leading to violence.
While the rest of Europe looked on in alarm, most nations were at that point not prepared to bail Greece out. German Chancellor Angela Merkel said the problems were Greece’s to solve, and there was no real plan within the European Union for what to do if a country within the eurozone were to default. The blame for the crisis then moved to the banks, who were having a pretty tough time with their reputation globally anyway. The US Fed started an enquiry into whether Goldman Sachs helped hide the scale of the Greek government’s borrowing by using derivatives contracts, and the prime minister called for a crackdown on speculators.
Finally, in April 2010, Greece asked for, and was given, international financial support. The eurozone countries provided EUR30 billion, with the IMF adding a further EUR15 billion. But even this wasn’t enough, the country’s credit rating was downgraded to junk status by Standard & Poor’s, and a final rescue package totalling around EUR110 billion was agreed by the EC, IMF and European Central Bank in May last year.
So, problem solved? Well, not really. Within Greece, there was a huge outpouring of public anger at the scale of the cutbacks Greece had to implement, and as unemployment rose, state revenues fell while costs increased. The global downturn also hit Greece hard, with fewer tourists contributing to the country’s coffers and shipping - another one of the country’s major industries - losing ground to Asian providers.
So although the focus now may be on Ireland and Portugal, as well as other shaky countries within the EU - and of course the huge debts the US and UK have run up - Greece is certainly not out of the mire. Many commentators predict the country will have to default on its debts to get its economy under control, pushing the cost of borrowing up even higher. And there remains anger that - unlike Ireland, Portugal and others, which were the victims of both mismanagement and circumstances - the Greek authorities simply lied about their economy. While unlikely, some anti-federalists believe the Greek crisis could bring down the whole euro project. More realistically, Greece may have to withdraw from the single currency, which would have huge ramifications both internationally and domestically.
Securities lending
So how does this affect securities lending? Short selling was banned for a couple of months at the height of the crisis, but the restrictions have since been lifted - naked short selling remains forbidden, however.
During the sovereign debt crisis, the local repo market seized up as investors grew increasingly concerned about counterparty risk and the likelihood of default by the Greek government. This left many holders of government securities stranded. At the end of last year, the European Repo Council unveiled a number of suggestions for getting the market moving again. These included:
A standing repo facility for primary dealers at the Greek debt management office (PDMA) or Bank of Greece along the lines of the facilities offered by the debt management agencies in Belgium, Netherlands, Portugal and the UK, lending temporary issues of securities which are scarce in the market (phantom/synthetic bonds). This would relieve the illiquidity of the Greek market and remove the need for the forced auction. An alternative in the form of a bond exchange was also mooted.
Interposing a CCP in a reformed daily repo auction to clear unsettled short positions. However, as credit issues would prevent Greek banks gaining access to an existing CCP, it was suggested that the PDMA act as a credit intermediary. Market users appeared to be willing to accept Greek sovereign risk in order to resolve settlement problems. It was generally accepted that the implicit borrowing fee needed to be high, in order to attract securities lenders (repo sellers), but only if the fee was capped and not disproportionate (in contrast to the forced auction). Initial suggestions were for a fee of 5-10 per cent.
Encouraging the ECB to recycle the Greek government securities that it is holding back into the market (while recognising that the ECB only has the power to recycle the securities that it has purchased since May 2010).
Maybe because they had other worries on their hands, the Greek authorities have so far been slow to act. The ERC is still waiting to hear if any of the proposals have been submitted to the country’s parliament, and the difficulties remain.
So that’s the bad news. But for the international players in the securities lending field, there has been huge opportunity. Because the Greek banks - regardless of their financial strength - have been tarred by the same brush as their government, investors are looking to those providers from outside the country to carry out their transactions.
At the height of the crisis last year, Citi launched agency securities lending in the country. J.P. Morgan has been in the market since 2008 and has picked up several new clients over the past year or so, while other major European and international banks also have a significant presence. “If you want a securities lending programme in Greece at the moment, you don’t go to the locals any more,” says one fund manager. “You go to the multinationals. They have the same levels of expertise, but they also have the global reach, which means access to more liquidity and reduced risk.”
According to Data Explorers, the volume of Greek government bonds owned by funds that permit securities lending is a bellwether for institutional ownership. The data shows that these funds went as underweight (compared to their benchmark) as they could or sold their holdings entirely, mainly during the April to July period last year, when the first bail out took place. Until very recently, there was little movement. In the last few days their holdings of Greek Government debt dipped below USD 8 billion for the first time.
Clearly, mutual funds are negative on the outlook for Greek debt overall and have sought to deploy their funds elsewhere. It is interesting to note that short sellers are not active, with demand to borrow Greek sovereign debt trending lower. This is not a short selling story.
Data Explorers focused on the standout mover, the 3.9 per cent 20 August 2011 issue (ISIN:GR0114019442). A recent spike in the demand to borrow this issue means that a record USD 300 million is borrowed while the institutional ownership fell significantly in late January. Some people are presumably forecasting that Greece will struggle to redeem this bond given how close we are to its final maturity.
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