"Hope is definitely not the same thing as optimism. It is not the conviction that something will turn out well, but the certainty that something makes sense, regardless of how it turns out."
Vaclav Havel
As a follow up to our recent credit conversations, it appears to us interesting this time around to focus on Greek equities, given Argentina and Russia are living proof there is life (and value!) after default. Having a brief overview to what happened to the Russian and Argentinian equity indices, could be used as long term proxy to what could happen to Greece's equity index ASE, following a default and a return to a "new" drachma.
Before we look at the possible medium to long term outcome, it is important, we think, to look at the evolution of the Greek index over time and its current composition.
ASE Greek index members as of the 24th of February 2012 - source Bloomberg:
The outstanding weight of "Financials" in the ASE Greek index, 21.70%:
Greek debt ownership as of 24th of February 2012 - source Bloomberg:
We know from our conversation "Schedule Chicken":
"The immediate write-down of the remaining 53.5% of principal on Greek debt equates to a net present value loss of over 70%. Given Greek banks have the largest exposure to their domestic debt, you can expect a lot more of additional pain for the likes of National Bank of Greece. Taking a 75% coverage on their Greek bond portfolio (12.9 billion euros as of June 2011) implies an additional pre-tax charge of just over 8 billion euros, or around 6.5 billion euros allowing for a tax credit according to CreditSights. National Bank of Greece's core tier one capital was only 6.3 billion euros in September 2011. The 30 billion euros capital shortfall derived from the EBA (European Banking Association) exercise in 2011, was based on 50% private sector value loss. An impairment of 70 to 75% loss would equate to an additional 45 billion euros worth of aggregate recapitalisation for the Greek banking system."
Given the outstanding weight of financials in the Greek ASE index and knowing their current Greek debt holdings, Alpha Bank, National Bank of Greece, EFG Eurobank and Piraeus bank respective equity is probably worth zero. It should in theory equate to an additional write down of at least 16.74% of the ASE Greek index.
ASE Index evolution from 1990 to May 1993 - source Bloomberg:
The ASE index is currently trading around May 1993 levels.
ASE Index evolution from 1994 to 2003 - source Bloomberg:
Since 1999, it has all been downhill from then.
ASE index year to date, picture taken on the 24th of February 2012, back to 1993 levels- source Bloomberg:
While discussing the subject with our friends at Rcube Global macro research, we thought it would be interesting to compare the evolution of the Greek Index relative to the GDP - Source Bloomberg:
Indeed, the ASE index matched the GDP level in November 2007, and today only represents 12.5% of GDP.
Argentina's Merval index in dollar terms, yes, there is life after default (2002) and value as well! Monthly evolution from March 1992 to March 2012 - source Bloomberg:
Argentina's Merval index in dollar terms relative to the local currency ARS from 1997 to December 2011 - source Bloomberg:
Russia equity index evolution from 1995 to March 2012 following the default in 1998 in USD terms:
From a low of 37.74 on the 30th of October 1998 to a high of 2498.10 on the 30th of May 2008.
Life and value after default, you have to be patient.
Greece has already reached its "Minsky" moment.
"A Minsky moment is the point in a credit cycle or business cycle when investors have cash flow problems due to spiraling debt they have incurred in order to finance speculative investments. At this point, a major selloff begins due to the fact that no counterparty can be found to bid at the high asking prices previously quoted, leading to a sudden and precipitous collapse in market clearing asset prices and a sharp drop in market liquidity." - source Wikipedia.
By preventing default, creative destruction cannot happen in true Schumpeter fashion. Minsky was a disciple of Schumpeter.
The work of Joseph Schumpeter, Hyman Minsky and Irving Fisher (see our post "AAA ratings - 10 little indians...and debt deflation - why Irving Fisher is right") should not be ignored, as highlighted by the recent work of Steve Keen - “A much more nebulous conception”
Schumpeter:
"There is another method of obtaining money...the creation of purchasing power by banks...It is always a question, not of transforming purchasing power which already exists in someone’s possession, but of the creation of new purchasing power out of nothing...which is added to the existing circulation."
(Joseph Alois Schumpeter, 1934, The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle).
Minsky:
"If income is to grow, the financial markets, where the various plans to save and invest are reconciled, must generate an aggregate demand that, aside from brief intervals, is ever rising. For real aggregate demand to be increasing, it is necessary that current spending plans, summed over all sectors, be greater than current received income and that some market technique exist by which aggregate spending in excess of aggregate anticipated income can be financed. It follows that over a period during which economic growth takes place, at least some sectors finance a part of their spending by emitting debt or selling assets."
(Hyman P. Minsky, 1982, Can “It” Happen Again? : Essays on Instability and Finance. Armonk, N.Y.: M.E. Sharpe).
On a final note, it is not a surprise for us to see a strong recovery for Iceland ("Iceland - The Great Debt Escape", August 2011), which was recently upgraded to BBB- by ratings agency Fitch.
Iceland in recovery mode Iceland stock market from March 2009 to March 2012 - source Trading Economics:
Iceland 5 year Sovereign CDS versus Ireland 5 year Sovereign CDS, 24th of February 2012 - source Bloomberg:
Since the start of the European debt crisis of 2010 and the significant widening in CDS peripheral spreads, Iceland has seen its CDS spread significantly tighten versus Ireland, 241 bps versus 571 bps, 330 bps apart as of the 24th of February. Iceland Sovereign 5 year CDS has tightened by 1230 bps since its 2008 demise.
In August 2011 we wrote:
"While Iceland is back from the brink by deciding not to save its banks, Ireland is still trying to recover from that ill-fated decision of bailing out its entire banking sector."
"I am not a pessimist; to perceive evil where it exists is, in my opinion, a form of optimism."
Roberto Rossellini
Stay tuned!
Vaclav Havel
As a follow up to our recent credit conversations, it appears to us interesting this time around to focus on Greek equities, given Argentina and Russia are living proof there is life (and value!) after default. Having a brief overview to what happened to the Russian and Argentinian equity indices, could be used as long term proxy to what could happen to Greece's equity index ASE, following a default and a return to a "new" drachma.
Before we look at the possible medium to long term outcome, it is important, we think, to look at the evolution of the Greek index over time and its current composition.
ASE Greek index members as of the 24th of February 2012 - source Bloomberg:
The outstanding weight of "Financials" in the ASE Greek index, 21.70%:
Greek debt ownership as of 24th of February 2012 - source Bloomberg:
We know from our conversation "Schedule Chicken":
"The immediate write-down of the remaining 53.5% of principal on Greek debt equates to a net present value loss of over 70%. Given Greek banks have the largest exposure to their domestic debt, you can expect a lot more of additional pain for the likes of National Bank of Greece. Taking a 75% coverage on their Greek bond portfolio (12.9 billion euros as of June 2011) implies an additional pre-tax charge of just over 8 billion euros, or around 6.5 billion euros allowing for a tax credit according to CreditSights. National Bank of Greece's core tier one capital was only 6.3 billion euros in September 2011. The 30 billion euros capital shortfall derived from the EBA (European Banking Association) exercise in 2011, was based on 50% private sector value loss. An impairment of 70 to 75% loss would equate to an additional 45 billion euros worth of aggregate recapitalisation for the Greek banking system."
Given the outstanding weight of financials in the Greek ASE index and knowing their current Greek debt holdings, Alpha Bank, National Bank of Greece, EFG Eurobank and Piraeus bank respective equity is probably worth zero. It should in theory equate to an additional write down of at least 16.74% of the ASE Greek index.
ASE Index evolution from 1990 to May 1993 - source Bloomberg:
ASE Index evolution from 1994 to 2003 - source Bloomberg:
ASE index year to date, picture taken on the 24th of February 2012, back to 1993 levels- source Bloomberg:
While discussing the subject with our friends at Rcube Global macro research, we thought it would be interesting to compare the evolution of the Greek Index relative to the GDP - Source Bloomberg:
Argentina's Merval index in dollar terms, yes, there is life after default (2002) and value as well! Monthly evolution from March 1992 to March 2012 - source Bloomberg:
Argentina's Merval index in dollar terms relative to the local currency ARS from 1997 to December 2011 - source Bloomberg:
Russia equity index evolution from 1995 to March 2012 following the default in 1998 in USD terms:
Life and value after default, you have to be patient.
Greece has already reached its "Minsky" moment.
"A Minsky moment is the point in a credit cycle or business cycle when investors have cash flow problems due to spiraling debt they have incurred in order to finance speculative investments. At this point, a major selloff begins due to the fact that no counterparty can be found to bid at the high asking prices previously quoted, leading to a sudden and precipitous collapse in market clearing asset prices and a sharp drop in market liquidity." - source Wikipedia.
By preventing default, creative destruction cannot happen in true Schumpeter fashion. Minsky was a disciple of Schumpeter.
The work of Joseph Schumpeter, Hyman Minsky and Irving Fisher (see our post "AAA ratings - 10 little indians...and debt deflation - why Irving Fisher is right") should not be ignored, as highlighted by the recent work of Steve Keen - “A much more nebulous conception”
Schumpeter:
"There is another method of obtaining money...the creation of purchasing power by banks...It is always a question, not of transforming purchasing power which already exists in someone’s possession, but of the creation of new purchasing power out of nothing...which is added to the existing circulation."
(Joseph Alois Schumpeter, 1934, The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle).
Minsky:
"If income is to grow, the financial markets, where the various plans to save and invest are reconciled, must generate an aggregate demand that, aside from brief intervals, is ever rising. For real aggregate demand to be increasing, it is necessary that current spending plans, summed over all sectors, be greater than current received income and that some market technique exist by which aggregate spending in excess of aggregate anticipated income can be financed. It follows that over a period during which economic growth takes place, at least some sectors finance a part of their spending by emitting debt or selling assets."
(Hyman P. Minsky, 1982, Can “It” Happen Again? : Essays on Instability and Finance. Armonk, N.Y.: M.E. Sharpe).
On a final note, it is not a surprise for us to see a strong recovery for Iceland ("Iceland - The Great Debt Escape", August 2011), which was recently upgraded to BBB- by ratings agency Fitch.
Iceland in recovery mode Iceland stock market from March 2009 to March 2012 - source Trading Economics:
In August 2011 we wrote:
"While Iceland is back from the brink by deciding not to save its banks, Ireland is still trying to recover from that ill-fated decision of bailing out its entire banking sector."
"I am not a pessimist; to perceive evil where it exists is, in my opinion, a form of optimism."
Roberto Rossellini
Stay tuned!
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