How Would New Greek Debt Affect Greek Stocks?

There is interesting news coming from Greece. A senior Greek finance ministry official recently told Reuters that the country could end a four-year absence from bond markets and issue more than $2 billion of five-year bonds in the first half of the year.

Why now?
The Greek government's initial plans were to return to markets in the second half of the year, but the falling bond yields are encouraging finance officials to consider a quicker return. Many analysts agree that the new Federal Reserve policy under Janet Yellen will begin to increase interest rates, and its impact on global rates could prevent Greece from issuing debt at lower rates than it does currently. The period of historically low U.S. interest rates is ending. In Greece, the benchmark interest rate, which is set by the European Central Bank (ECB), is currently at its record low of 0.5%, while the average rate from 1998 up to 2014 is 2.6%. Although the Fed's and ECB's policies are not coordinated, if the Fed continues its gradual rate increase, the ECB might eventually do the same to prevent capital from flowing across the Atlantic in search of better rates.

More money on the way?
Greece is also on track to receive an $11 billion aid payment from euro-region authorities. This is good news, as the country needs fresh cash to avert default in May, when the government has to repay $17.2 billion of government debt, including short-term paper. The Mediterranean nation was granted a 130 billion euro bailout package in 2012 but has not received a payment since December.

In order to get these loans approved, the country is required to make some changes, which may have a direct impact on companies. Greek lawmakers are considering new measures that range from extending the shelf life of milk to allowing more stores to open on Sundays.

As you probably know, the country cannot implement monetary policy, as this power has been delegated to the ECB. This only leaves room for fiscal policies. Normally, orthodox fiscal adjustments include government expense cuts and tax increases, which the Greek government has already tried without much success. Nonetheless, some infrastructure projects are on the way. The country plans to build a 750 million euro airport project on the island of Crete, a 400 million euro highway between Corinth and Patras, and a high-speed rail network.

What this means for the market
Actions like these will impact many stocks including Greece's primary ETF, Global X FTSE Greece 20 (GREK 2.45%). The fund has a large exposure to financial institutions, holding 8% of its assets in Piraeus Bank and another 10% split between National Bank of Greece (NBG.DL) and Alpha Credit Bank.

The situation in Greece led to a substantial drop in the National Bank of Greece's balance sheet. Last year, the Greek government managed to recapitalize the country's banks thanks to a 28 billion euro bailout. As a result, it kept majority stakes in the banks, including National Bank of Greece.

Despite the challenges, the bank is improving. Net profit in 2013 was 809 million euros, compared to a 2012 loss of 2.1 billion euros -- that's an impressive come back. Nonetheless, last month the bank announced that it required additional capital of 2.2 billion euros, which it will raise through internal improvements and asset sales instead of the issuance of additional shares. Let's not forget that the bank also sold more than 1 billion euros in assets last year.

Global X FTSE Greece 20's largest position (13.4%) is in Coca-Cola Hellenic Bottling (NYSE: CCH), one of the largest Coca-Cola bottlers in the world. If the measure allowing stores to open on Sundays gets approved, this company should experience an increase its sales, or at least higher traffic in points of sale. Coca-Cola Hellenic showed a weak performance in 2013, with revenue down 2.4% compared to 2012, which was a challenging year as well. Despite the results, the bottler maintained its volume share in sparkling beverages and value share in the non-alcoholic ready-to-drink beverages categories in most of its markets. In addition, the company improved its operating profit by centralizing business services in low-cost environments and investing in opportunities for cross-border manufacturing and logistics. As a result of these initiatives, operating margin increased after several years of decline.

If you want to own a Greek company without much exposure to the country, you can consider Dryships (DRYS), which specializes in shipping drybulk commodities (e.g., iron ore, coal, and steel) and drilling rigs. Unfortunately, Dryships announced a net loss of $223.1 million for fiscal 2013. However, drybulk shipping rates and ship values have improved recently, and the company's management believes this trend will continue throughout 2014. Plus, its majority ownership of Ocean Rig UDW should work as a major catalyst for growth in the long run. Why? Simply because the company's strategy is to refocus from being a drybulk cargo operator to becoming an ultra-deep drilling company. This seems to be the right idea, as the discovery of several new deepwater oil reservoirs is pushing demand for the company's services.

Final thoughts
Greece has faced repeated questions about its ability to finance itself amid the strict requirements of its rescue package and the skepticism of financial markets. The country is now in its second bailout program and still requires financial help to avoid defaulting on its debt.

In addition, Greece still has unemployment figures that surpass 25%, and more orthodox fiscal policies will only bring more problems than solutions. Nonetheless, the infrastructure projects are positive.

Regarding the issuing of bonds, no final decision has been made, but the country will likely re-enter the markets before mid-year. An extension or addition to the current bailout isn't yet on offer either, but it remains a possibility as well. Anyhow, the overall impression is that money will continue to flow into the country. Why? In 2012, ECB President Mario Draghi famously announced that the ECB would "do whatever it takes" to safeguard the euro. This reinforced the ECB's commitment to make unlimited purchases from troubled eurozone countries that apply for aid. Thus you should not expect a Greek default anytime soon.

So should you start a position in Greek assets? You could, but proceed with caution, as banks are sensitive to the country's economic sentiment and could bring the Greek ETF down. National Bank of Greece is certainly improving, mostly thanks to its operations in Turkey and Southeast Europe. It's likely that the bank will continue to adjust by selling assets this year, and these operations should help its overall position.

Coca-Cola Hellenic is a lot less exposed to Greece, as it distributes its beverages in about 30 countries throughout Europe. Nonetheless, it could face further pressure in its Russian and Ukrainian markets if the political and military situation worsens.

Dryships is an interesting asset, but you have to think of the long term. The company's stock price soared 117% last year, and unless there is a substantial increase in new shipments and drilling contracts, its stock price might soon level off or even correct. Industrial demand in China is key here, as the country is the biggest steel-consumer and a huge importer of iron ore.