On Monday the Greek stockmarket finally re-opened, after being closed since the end of June.
This should have been a moment of celebration, and a sign that Greece was now open again for business (though some capital controls remain). However, in the end it proved to be a disaster.
The market promptly plunged – with shares in the big four banks falling so much that trading in them was stopped. At one point it was down by around 25%.
Meanwhile, the fine print of the deal between Greece and its creditors is still being agreed. Indeed, there are growing fears that Athens could still fail to make its next debt repayment.
So I’d guess that buying Greek shares would be the last thing on your minds. However, the best time to buy is when everyone is running away – so bear with me why I explain why Greece looks like a good investment.
Greece’s latest bailout is not yet finalised
On 5 July, Greek voters voted on 5 July in an emergency referendum to reject a proposed bailout deal. Not to be bothered with small things like the wishes of its voters, Athens went ahead and agreed a new bailout that required harsher cuts than the deal they rejected.
The problem is that agreeing the small print is proving tougher than expected, for several reasons.
Firstly, there is a lot of opposition to the deal within Greece. While the Greek PM, Alexis Tsipras, was able to get the deal through parliament with the support of the opposition parties, many of his own MPs voted against it.
This rebellion is growing stronger by the day. A planned ballot of Syriza’s membership as a whole has had to be called off (and replaced with a congress in September) because it became clear that they would vote against it.
The International Monetary Fund (IMF) is also opposed to the deal. This is because it wants debt relief to be a key part of any agreement.
At the same time, Germany thinks it is vital that the IMF is involved. But it will not agree to the discussion of debt relief that the IMF insists on until there is evidence that the Greek government is meeting its targets.
A €3bn-deadline looms
All this is taking place against one big deadline: that repayment of €3bn in loans from the European Central Bank (ECB), due on 20 August. This means that some sort of deal – either the full bailout or at least a bridging loan – has got to be agreed in less than three weeks.
Meanwhile the chaos of the past month has had a big impact on the Greek economy. One visible sign of the damage is the fact that economic confidence in Greece has plunged to levels not seen in the past two years.
The past relationship between confidence and GDP implies that the fallout could be as much as 7% of GDP, reckons Capital Economics. While the true figure may a be bit better, Greece will find it very hard to meet it deficit targets.
That could lead any deal collapsing anyway, agreement or no agreement.
Both sides are preparing for the return of the drachma
What’s more, there are signs that both sides are preparing for the deal to collapse.
Last week it was revealed the former Greek finance minister, Yanis Varoufakis, had been trying to clone the national database of taxpayers, which was under the control of the Troika of the European Union, ECB and IMF. Doing so would allow the state to keep payments running if the drachma was brought back in.
These revelations have brought predictable outrage from the Greek opposition, as well as some European finance ministers – and even calls for prosecutions. However, instead of distancing himself from Varoufakis, Tsipras has defended the plan as a necessary “Plan B”.
For its part, Germany has been dropping pretty heavy hints that it wouldn’t be too sad if Greece left the euro. Indeed, Germany’s finance minister still insists that Greece may need to take a short-term “time-out” from the euro.
My guess is that both sides want Greece to quit the euro and are just trying to do it in such a way that they avoid the blame for their actions. This would also explain Germany’s contradictory position on IMF participation and no immediate debt relief.
Why we’re still bullish on Greek stocks
So why are we optimistic about the Greek stockmarket?
The main reason is that, contrary to the hysteria, we have always thought that a default and a Greek exit would be the best thing for all concerned.
Not only would it allow Greece to reduce its debt burden, it would also allow it to get wages down to a competitive level.
Of course, you should never underestimate the desire of countries such as France (and of course the USA) to try to keep Greece in. However, there are signs that some sectors have already reached competitiveness, with hotels enjoying a bumper season after slashing prices.
We’re also attracted by the bargain-basement nature of Greek stocks, which trade at a cyclically adjusted price/earnings ratio (Cape) of three, and at a hefty discount to the reported value of their net assets.
Obviously, the banking sector is one downside risk. It’s possible that it could be taken over by the state, with shareholders getting little or nothing. However, banking stocks only account for around a fifth of the Greek stockmarket.
So we think it’s worth taking a punt on Greece. The Lyxor ETF FTSE Athex 20 (Paris: GRE) is one easy way to invest.