Greek Debt Betting on Bonds

While Greece teeters on the brink of bankruptcy, some large investors are putting their faith in Athens and purchasing government debt.
All eyes are on Greece these days. Some are even putting their money on it.

As a national referendum on Greece's potential deal with creditors looms on Sunday, the country's future in the euro zone seems more uncertain than ever. But some large investors are apparently not bothered by any anxiety. They are thinking of betting on Athens once again — via government bonds.

Bargains are beckoning there. Ever since negotiations between the leftist government in Athens and its international creditors began to seem more and more likely to fail in recent weeks, the price of bonds has fallen dramatically and their yields have shot upward.

Other investors want to retain their small share of Greek bonds and are purchasing government securities in the rest of southern Europe. There as well, the Greek drama has carried bonds along in its wake.

In a world of record-low interest rates, Greek bonds are appealing with their double-digit returns. Although the future of the country remains difficult to predict, investors not adverse to risk are daring to get involved. They are betting profits can be had — and national bankruptcy can be averted.

Julian Adams, the head of Adelante Asset Management in Britain, is among those investors keeping an eye on Greece. The hedge-fund manager said he sold his Greek bonds a while ago for a reason. “We thought that the whole affair in Greece couldn't take a positive turn as long as the population didn't stand behind the reforms and vote for them in a referendum,” Mr. Adams said. But since just that sort of vote is set for Sunday, Adelante is considering the purchase of Greek securities once again.

The decision to buy in ultimately depends on how one predicts the referendum will go. Mr. Adams is optimistic: “We think that the population will make the right decision and vote 'Yes.' ”

Pimco expects that even after an agreement between creditor countries and Greece, the country will experience a further haircut.

Likewise moving against the mainstream is American hedge-fund manager and billionaire Paul Kazarian who, with over €1 billion, says he’s Greece's largest private creditor, through his Japonica holding company. Private investors hold only a fraction of the almost €40 billion (or $44.3 billion) in Greek government securities in circulation. The largest amount of the bonds are owned by the European Central Bank.

All told, the economically devastated country owes international creditors €320 billion.

Mr. Kazarian, a former Goldman Sachs consultant, had tough words for the Athens government, which has suggested solving the crisis through a large-scale refinancing. But in Mr. Kazarian's analysis, such measures would actually lead to an increase in the burden on Greece. He figures the interest payments due in 2015 would triple, the debt level would rise 28 percent, and there would be a loss of €22 billion.

“That comes from the fact that Greece has a finance minister without any experience in financing, accounting and management,” Mr. Kazarian said.

He doesn't rely on the usual indicators used by investors to calculate value. For a long time, Mr. Kazarian has argued for representing the country's indebtedness not in nominal amounts but in economic values — similar to the way companies keep their books. In this calculation, the rates of interest and terms of repayment play an essential role for the evaluation of the debt load. Moreover, assets are included along with debts.

From Mr. Kazarian's point of view, Greece's actual level of debt is much lower than it seems at a first glance, because of the already negotiated interest-rate reductions and due-date extensions for loans. His assessment is at odds with the many Europeans who consider Greece a hopeless case and a Greek government that seeks reductions in loan terms because of its dire financial state.

Large investors are buying Greek bonds again, according to sources including Deutsche Bank subsidiary Deutsche Asset & Wealth Management (DeAWM). The subsidiary is reportedly holding Greek government securities once again on the orders of its large investors. DeAWM had no comment in this regard.


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Other large fund institutions hold small amounts of Greek securities — among them the Allianz funds subsidiary Pimco and Allianz Global Investors. “We are waiting things out,” said Andrew Bosomworth, Pimco's head of German operations.

Pimco expects that even after an agreement between creditor countries and Greece, the country will see another debt haircut. If an agreement is in fact reached, Pimco could purchase additional bonds and enjoy short-term gains, Mr. Bosomworth said.

And if the situation does come to a so-called Grexit from the currency union, then managers of the world's largest private fund investor intend to buy securities of other countries in southern Europe, whose prices can then be expected to come under further pressure.

Many money managers see opportunities in southern European bonds. Frank Engels, the head of the bonds department at Union Investment, said he’s watching whether countries such as Italy and Spain are able to attain financing on the bond markets with no problem. “That would be an important signal regarding trust,” he said.

The market considers the danger of infection for the peripheral countries in southern Europe to be slight, said Asoka Wöhrmann, chief strategist for DeAWM. He sees “selective entry chances once again” if the returns on southern European government bonds increase further in comparison to German state securities.

Frank Hagenstein, chief strategist at the Sparkasse subsidiary Deka, believes bond prices will rise again in the medium term. Whether other investors see things similarly should be evident at the latest after Sunday’s referendum.


Anke Rezmer covers the investment fund industry for Handelsblatt from Frankfurt. Katharina Slodczyk is Handelsblatt's London correspondent. Frank Wiebe is a New York correspondent for Handelsblatt. To contact the authors: [email protected], [email protected], [email protected]