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Headlines Say Greece Is Back, but Are They Right?


The Greek government had a strong bond offering on Thursday, but since then the National Bank of Greece has plummeted.

Global debt markets have finally welcomed back Greece, but recent price action in the National Bank of Greece (NYSE:NBG) may signal all is not entirely well. On Thursday, April 10, the Greek government returned to the bond market after a four-year exile due to spiraling debt and irresponsible financial behavior over the last decade. Greece raised €3 billion in a five-year bond auction as foreign investors oversubscribed the issuance. The event was a milestone for the distressed country, but an almost 20% drop in the National Bank of Greece's stock price since then has kept investors on their toes.

The story partially begins with a stress test by Greece's central back last month which indicated that the National Bank of Greece needed an extra €2.18 billion of capital to meet safety requirements. NBG initially said that it would focus on selling non-core assets to resolve its capital gap, as opposed to offering additional equity to the market. The bank's tune changed this past weekend, however, when Reuters published reports claiming that NBG had picked Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) as global coordinators for a planned equity offering.

NBG's Greek peers Alpha Bank (OTCMKTS:ALBKY) and Piraeus (OTCMKTS:BPIRY) successfully raised funds in March, combining for around €3 billion between the two. The banks' equity offering, alongside the government's debt auction last week, signal that foreign appetite for battered Greek assets may be improving, albeit at a slow pace.

The issue remains why NBG has been such a weak performer. I, among other traders in the investment community, saw the recovery of Greece as a major theme in 2014 and believed a great way to gain exposure was through National Bank of Greece stock. The reality is that although everyone wants to jump on the Greece bandwagon, fundamental weakness that underlies the economy still remains.

Just two years ago, Greece was expected to default on its loans and be the first country to exit the euro, potentially setting off a domino effect that would shake global markets. Today, after required layoffs, wage cuts, and decreased government spending, the Greek economy is worlds removed from where it was in 2010.

Consumers have begun buying cars and making other big-product purchases, and the government has said it wants to end its reliance on the strict international emergency-aid program this year. For all of the positives, however, it is too early to determine whether Greece's recovery will be a success. The country's unemployment rate has stopped rising but remains at a record high near 28%. Similarly, a majority of those unemployed are between the ages of 20 and 30, which could hamper earnings potential and productivity for decades to come. Greece's debt to economic output ratio is still at a staggering 175%, and without improving economic output, it could be very difficult to meet its target of 110% by 2020.

This realization, alongside the reduced share price that comes with offering more shares to the market, has weighed on NBG, but what explains the strength of Greek bonds? There is one justifiable reason why the Greek bond offering attracted so much attention: It offered a more superior yield than can be found anywhere in the sovereign debt market right now. Greece sold its five-year notes due in 2019 for a yield of only 4.95%. Compare that to Germany's five-year bund, yielding 0.59%, and the US Treasury five-year note with a yield of 1.57%. In a relative sense, 4.95% is a major upgrade, even if it means tying up money in an overly indebted island nation for five years.

Some may argue that NBG's price tank was a classic sell-the-news example --  we all expected Greece to recover, and now that it has, its luster has faded. That may be true to some degree, but austerity protesters still line the streets and Greece still owes a lot of money to creditors while it struggles to find stable growth. The potential of more strife and lackluster economic performance could continue to weigh on NBG, even as headlines tout the return of the Greek economy.

Andrew Sachais' focus is on analyzing markets with global macro-based strategies. He takes into consideration global equity, commodity, currency, and debt markets. Sachais is a graduate of Georgetown University, where he earned a degree in Economics.

Follow Andrew on Twitter: @MacroInsights
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