Views

North Asset's Papamarkakis Sees Europe's Debt Crisis Resurfacing

Europe's sovereign-debt crisis will resurface in markets even after the European Central Bank pumped money into the banking system and Greece restructured its debt, according to George Papamarkakis at North Asset Management LLP. "We still have big issues," Papamarkakis, chief investment officer and co-founder of North Asset, said at a Bloomberg Link conference in Frankfurt. "Portugal needs to tap the credit markets next year and clearly that is not possible. Everyone is looking at Spain and France is the big elephant in the room." Spanish bonds fell for a ninth day today and the euro dropped against the yen and the dollar. A measure of manufacturing in the euro area contracted in March more than forecast, adding to concern that the major European economies of Germany and France are slowing. "The ultimate result is really very difficult to predict, but we will have some kind of common issuance or some countries will go out" of the 17-nation euro area, London-based Papamarkakis said. "But we will see a lot of volatility." The manager said that his company holds instruments that climb with rising volatility in fixed-income and interest-rate markets. He owns some sovereign bonds in the region, while he has shorted debt from other nations he didn't identify. Short sellers profit from taking bets that securities will drop in value.

Bet on Volatility

Investors should bet on an increase in volatility, said David Hauner, head of eastern Europe, Middle East and Africa fixed-income strategy and economics at Bank of America Corp.'s Merrill Lynch unit.
"The one thing you should be doing right now is buying volatility, because it is ridiculously low," Hauner said at the same conference. "It is hard to see what will we be the next source of disruption. But it is very clear that there will be a significant spike in volatility." Greece pushed through the biggest sovereign-debt
restructuring in history this month after getting private investors to forgive more than 100 billion euros ($132 billion) of debt. The Mediterranean nation needed the deal to obtain a second bailout from the other 16 euro-area countries. Politicians think that a country can default without disrupting the markets, Papamarkakis said.
"Greece means the private sector and the banking sector is in a worse situation, and that is what will happen with Portugal. We are actually increasing the risks" with bailouts for states and banks, "and I don't know if politicians appreciate the Pandora's Box they've opened with this Greece default."

Alexis Xydias and Abigail Moses (Bloomberg)

La crisis de la eurozona: sin final a la vista

La crisis periférica de la eurozona, que comenzó la pasada primavera con Grecia, ya se ha instalado en Irlanda y Portugal, pronto lo hará en España y posiblemente también en Italia, donde llegado el momento se pondrán a prueba los cimientos de la eurozona. A diferencia de lo que sucedió en 2009, cuando se observó una política global coordinada motivada por unos intereses alineados para lograr que la arquitectura financiera del globo siguiese funcionando, en 2010 asistimos a una reducción de esta coordinación en el contexto general, pero también dentro de la eurozona. Más políticas a escala nacional y menos coordinación han sido normas históricas de la Unión Europea (UE) en tiempos de recesión, y parece que se van a intensificar ahora que la crisis fiscal y económica que parece sepultar Europa es de una magnitud sin precedente. Esta postura se ha evidenciado recientemente en la propuesta alemana para que el sector privado comparta la responsabilidad en cualquier posible proceso de reestructuración soberana, y que contrasta con la retórica de la pasada primavera, cuando se decía que “ningún país de la eurozona quebrará”. Después de muchas décadas proveyendo fondos estructurales cohesionados, los países que forman el núcleo europeo se encuentran comprensiblemente reacios a continuar compartiendo las responsabilidades fiscales con los países periféricos. Por lo tanto, el surgimiento de más políticas nacionalistas en Europa será un rasgo del futuro y, como resultado, observaremos más políticas provocadas por la volatilidad de los mercados.

En el centro de la problemática se encuentra la opinión diferenciada de los países periféricos y los del núcleo. Los países periféricos enfatizan la visión de que la recesión ha sido cíclica, acentuada por una crisis financiera. Mientras que los países del núcleo enfatizan, a su vez, la palpable debilidad estructural del crecimiento económico de los países periféricos. El hecho, no obstante, es que el crecimiento económico de los países periféricos está basado un consumo doméstico facilitado por el crédito que ha resultado en la construcción de un déficit sin precedentes y unas responsabilidades externas colosales en Grecia, Portugal, España y, en menor medida, Irlanda e Italia, que los mercados no creen sostenible. Más allá de la consolidación financiera que ha sido requerida y que ya se está tratando de conseguir, los países periféricos necesitan recalibrar, de forma simultánea, sus economías hacia un modelo más sostenible –menos basado en el consumo interno y más en la demanda externa-. Para poder lograr este objetivo necesitarán implementar unas reformas estructurales mucho más ambiciosas que puedan impulsar de forma significativa su competitividad. Al mismo tiempo, necesitarán fortalecer su sector bancario interno considerablemente, forzando extensas recapitalizaciones en el sector privado, no sólo para cubrir las pérdidas en préstamos no reconocidas, sino también para asegurar que el sector bancario puede apoyar un crecimiento futuro.

Todas estas sugerencias serán difíciles de implementar en los países periféricos porque exigirán costes políticos y económicos para los intereses locales arraigados. El retraso continuado de implementar estos cambios conllevará un marco cada vez más complicado para eludir la recesión, especialmente en un escenario internacional avasallado. 

El Boletin - 05/01/2011


Only Supply-Side Reforms Can Save Greece  

It is unfortunate for the new Greek government that it finds itself in the cross-fire of the markets' credibility war on the euro zone. What is at stake is not just the Greek economy, but the credibility of the European Central Bank and Euroland as a whole.

Greece is, though, as Prime Minister Giorgos Papandreou acknowledged, the weak link. The markets' main concern now is whether the government's budget consolidation plan will actually be implemented and, if not, how the rest of the euro zone and the ECB would react to such a failure.

The real problem, however, is that even if Athens manages to push though its program of tax hikes and spending cuts, it is questionable whether these measures would be enough to arrest the decline in Greece's already unsustainable public finances. Many economists are treating Greece's fiscal deterioration (in 2009, the deficit was 12.7% of GDP and overall debt was 113.4% of GDP) as cyclical and are ignoring the underlying structural issues. Greece needs to recalibrate its economy; it must move away from credit-driven domestic consumption to a more balanced growth model while simultaneously addressing the substantial fixed expenditures of its entitlement programs.

Are current measures enough? The answer has to be a resounding no. Greece is one of the most closed economies in Europe, with one of the world's lowest levels of foreign direct investment per capita and one of the highest "informal" barriers to entry within Europe. It is no coincidence that the Greek retail industry is so dominated by Greek companies. Foreign multinationals are essentially unable to operate in Greece without local partners. As a result, Greece has one of the priciest tradable-goods sectors in Europe.

The fact that currency devaluations are no longer an option for euro-zone members is often seen as a disadvantage for Greece and other periphery countries currently in trouble, such as Spain or Portugal.
This is one of the most misunderstood issues by the market. Past devaluations have not addressed Greece's lack of competitiveness and would not do so today. Greece's fundamental problems are structural. To regain lost competitiveness, Greece needs to implement supply-side and institutional reforms, such as reducing the number of state-owned companies. This would make the economy more competitive, and reduce sources of corruption and nepotism. Instead of rotating senior civil service staff in line with the political cycle—further exacerbating an already ineffective bureaucracy—these appointments must be made based on merit, not party affiliations. Due to the lack of political will to face down illegal land claims, Greece—together with Albania—is now the only country in Europe that does not have a centralized and computerized land registry, a fundamental principle of any modern economy. As a result, farmers would routinely start cultivating public land, claim it as their own and eventually even receive agricultural subsidies.

Institutional reform must lead to a significant reduction in regulatory and legal uncertainty. At the moment, businesses need numerous approvals and have to follow myriad regulations in order to operate in Greece. What's more, these bureaucratic hurdles change with high frequency. The exceptionally litigious nature of Greek society and the huge backlog at Greek courts only add to the high costs of doing business in Greece.
Greeks complain all the time about why the prices of products are more expensive than in the rest of Europe. They wouldn't be if only Greece would level the playing field for businesses and allow the competitive forces of a free-market economy to work. Finally, political parties need to fortify their positions against special business-interest groups that, through their control of the media, still steer the political agenda.
Luckily, this government has a strong mandate and is led by a reform-minded prime minister. Now is the time to promote an honest economic debate within the country. The Greek press can help with more objective, factual reporting rather than sensationalizing the situation at every opportunity. It is particularly unhelpful when the media blames "foreign speculators" (which undoubtedly exist but are not the cause of the problem) for all of the country's economic ills. Let's not forget, after all, that in the past two months alone, foreign creditors have seen the value of their Greek government bond holdings fall by 20%—a loss of tens of billions of euros.

Greece has substantial debt-servicing needs in April and May that, together with the country's regular spending requirements, means it must soon borrow an estimated €20 billion. This would be a test for any country of this size let alone one that has damaged its reputation in international markets. Investors will likely want to see more action from the government before buying any more Greek bonds. This will be true irrespective of the general consensus—Thursday's inconclusive European Union summit notwithstanding—that because the euro is ultimately a political creation, the euro-zone countries (e.g. Germany) will eventually bail out Greece.

Without comprehensive reforms, the costs for Berlin may go beyond just financing Greek debt. The real price might be a convergence of German yields to the high level of Greek bonds rather than vice versa. It is this inverse convergence that fiscally orthodox countries are now starting to fear and which may be beyond the control and abilities of the ECB. As Greece's economy is in for a demand-led contraction, only supply-side reforms can restore economic growth and investor confidence in Greek debt.

Mr. Papamarkakis is co-founder and managing partner of North Asset Management, a London-based asset management company active in the European government bond markets.

The Wall Street Journal - 14/02/2010 


Videos 

Papamarkakis Sees `Very Few Safe Havens' Around World (Video)

 

George Papamarkakis, chief investment officer at North Asset Management LLP, discusses the performance of the MaxQ hedge fund and his search for havens in which to invest. He speaks with Owen Thomas on Bloomberg Television's "On the Move."

Bloomberg 23/01/12