Greece: Good News and Bad News

For investors looking at international markets, Greece represents an interesting case. Held up as the poster child for national economic problems, the nation has required multiple bailouts from the European Central Bank, ranks among the highest unemployment rates in the Western world, and has an economy expected to contract nearly 4% for 2013 on top of the double digit contraction endured over the last few years. But Greece is taking meaningful steps to reverse the decline and return to growth. Let's look at the situation in Greece from two angles.

The good
After taking billions of euros in bailouts from the European Central Bank, there may be some light at the end of the tunnel for Greece. Deputy Prime Minister Evangelos Venizelos said Greece doesn't need a third bailout and will be able to meet its needs through negotiations on existing debt. This should be seen as a positive for Greek companies, as it will bring some investment confidence back to Greece and strengthen investment in Greek companies.

Another beneficiary of a more stable outlook for Greek debt are banks that have large amounts of Greek debt. Among the biggest holders of Greek debt is Italian bank UniCredit (NASDAQOTH: UNCFF  ) . With billions of euros in Greek debt, the bank would see a major benefit from a more stable Greece. In addition, a more stable Greece means a more stable eurozone and could increase economic confidence throughout the area.

On the banking side, all of Greece's major banks except Eurobank were successfully recapitalized and remain privately controlled. In the weeks leading up to the recapitalization, fears spread that National Bank of Greece (NYSE: NBG  ) would need to be nationalized. However, the bank was able to raise enough funds from private investors and avoided nationalization along with rivals Alpha Bank and Piraeus Bank.

Despite the recapitalization, the market is still assigning above average risk to National Bank of Greece  (NYSE: NBG-A  ) Series A preferred stock as it trades around $0.50 on the dollar. Dividends on the preferreds are suspended to preserve capital, but if the bank does eventually turn around, the preferreds get dividends before the common shares.

Economic growth trends are also becoming more favorable in Greece. After having its economy contract 6.4% in 2012, the Greek finance ministry now predicts that the 2013 contraction will be only 3.8%, a number lower than previously estimated. In addition, the finance ministry expects growth to exceed the 0.6% forecast for 2014. These signs suggest that Greece is near the bottom, but not all problems are over.

The bad
Even with the slowing recession, Greek unemployment still stands at 28%. With so many people out of work, the benefits of a recovery are taking too long for many Greeks. Protests are still a frequent occurrence as workers protest pay cuts and the unemployed protest the poor economic conditions. Even when Greece returns to growth, it will still take a long time to work through the massive unemployment that exists in this depressed economy.

Greece also has a major issue with foreclosures that still has to be addressed. Because of the collapse of the economy and housing market, a massive wave of foreclosures was set to begin until the Greek government stepped in to halt foreclosures. Now the government is set to begin loosening the restrictions on foreclosures. Although this can be seen as a step in the right direction, the sheer number of foreclosures there will be is bound to start more protests, and even the foreclosed homes are only usually only worth a fraction of the original loan values. The process of allowing foreclosures will probably be slowly implemented but could represent a major overhang on the economy going forward.

Forward outlook
There are fewer countries with an economy more beaten down than Greece as the nation faces high unemployment, a contracting economy, and sovereign debt issues. But with the economy expected to shrink less than expected this year and begin a little growth next year, there may be a light at the end of the tunnel for Greece on a macroeconomic basis.

The nation still faces major challenges going forward, including managing its debt, getting people back to work, and letting the foreclosure process resume at a reasonable rate. In all, Greece is making progress, and those investing for the long term should do further research on whether to invest in this economically unloved nation.

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