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Politics trumping economic prudence in Greece
The politics of the Greek recovery narrative is consistently trumping prudence. For those who refuse to be blindsided by the staged recovery euphoria there is enough evidence on the ground in Athens to be concerned about during the past week.
After receiving preliminary news of the Greek economy’s performance in Q1 of 2014, namely negative growth of 1.1 per cent, the pocket calculators were quickly set in motion to analyse what it would take to reach positive growth territory in the remaining three quarters. However, forgotten in the fog of GDP calculations was the rather inconvenient truth that Greece registered its 24th consecutive quarter of negative GDP.
It remains to be seen if positive growth for the full year is possible. While the Greek Finance Ministry, the International Monetary Fund and the European Commission remain optimistic, the Organisation for Economic Cooperation and Development takes a contrarian view. The Paris-based organisation expects Greek GDP to continue being anchored in negative territory during 2014.
If a projected GDP performance of 0.6 per cent in 2014 for Greece can be attained, as the Bank of Greece argues, it would indeed signal a return into positive territory after five gruelling years of recession. But such a performance would still have to be called by what it is: sluggish at best. At such a low level GDP growth would not be able to leave any positive transmission impact on reducing mass unemployment in the country.
Telling private households and businesses that haven’t even reached halfway through this year that such a performance would improve further in 2015 is akin to informing a drowning man that the rescuers are still in the process of debating the concept of the life saving manual.
The news of the week in Greek corporate affairs was dominated by banks. The headlines were captured yet again by Piraeus Bank when it announced the acquisition of a 17 percent stake in Marfin Investment Group (MIG) for 250 million euros.
MIG is a holding company that has a rather unimpressive track record of investing in predominantly Greek and Cypriot sectors such as healthcare, food products, airline transportation and banks. Marfin’s chairman is Andreas Vgenopoulos who was also the chairman of Laiki Bank in Cyprus in March 2013 when it was closed down and its sustainable parts were incorporated into Bank of Cyprus, along with 9.5 billion euros of liabilities from Emergency Liquidity Assistance (ELA).
The Piraeus Bank-MIG transaction raises a number of serious questions and deserves greater scrutiny instead of instant cheerleading. For one, we can now see how Piraeus Bank is using parts of the recently raised capital of 500 million euros. It is not earmarking these resources for lending to Greek SMEs, which are in dire need of business loans and working capital at lower interest rates. In fact, Greece’s real economy is not the primary target of its current investment activities.
The contrary is the case. Piraeus Bank is immediately using fifty per cent of April’s bond proceedings to buy a major stake in a highly indebted company. According to MIG’s 2013 annual report, the company had debt three times the size of its equity. It will be interesting to see how the European Central Bank, when it carries out the asset quality review and stress test of Piraeus Bank will analyse this acquisition in terms of risk weighted assets and whether it will identify additional capital needs as a cushion against such risks.
One further issue deserves greater scrutiny. Surprising as the brazen deal was, it begs the question how Piraeus Bank’s largest shareholder, the Greek Hellenic Financial Stability Facility (HFSF), came to approve such an investment? This is not to suggest any improper action, but rather to ask if the HFSF is comfortable with such a movement by Piraeus Bank at a time when the domestic lender is already having to digest various other acquisitions from the past two years. Put otherwise, is the prime purpose of a successful return to corporate bond markets by a Greek bank to continue along the M&A path with an equity investment in a holding company that risks looking more like a lifeline for MIG than a sound return on investment by Piraeus Bank?
Finally, the hedge fund investor John Paulson is placing a large bet on Greek banks, including Piraeus Bank. On the day the transaction was announced he saw his shareholding stake decline in value by 11 percent. It’s not the only loss his hedge fund Paulson & Co. has had to suffer during the past 12 months. But he may start looking at Piraeus Bank in a less favourable light.
*Jens Bastian is an independent economic consultant and investment analyst for southeast Europe. From 2011 to 2013 he was a member of the European Commission Task Force for Greece in Athens. He is a regular contributor to The Agora section of Macropolis. Follow Jens on Twitter: @Jens_Bastian
I have now spent a bit of time looking into the financials of the MIG Group. The result can be read below.
Hats off to your mentioning the Piraeus/MIG deal. I am not privy to any inside information here but common sense suggests that this deal has a 'smell' to it and is certainly not the kind of financing which Greek banks, short of liquidity, should undertake in these difficult times. If Piraeus wants to finance the productive activities of MIG, that would be fine but then they should finance the operating companies directly and for specific purposes. If Piraeus extends general purpose financing to the holding company (and buying convertible bonds is exactly that), there is no way of telling what the cash will be used for and, judging by MIGs track record, I would have great reservations. Not to mention the fact that the HFSF should have had great reservations (or rather: objections).