Why There Could Be Hope for Greece

Dear Fools,

Maybe we had it wrong. We came to Athens in search of shorting ideas -- based on what we'd read in the U.S. media and the numbers we'd seen, it didn't look as if Greece had many outs to its economic and financial problems. Germany wanted no part of a solution, and the E.U. wouldn't let the IMF step in. Even if Greece sold any additional debt, the interest rate it would get on it wouldn't be enough to placate the other countries using the euro.

The doomsday scenario was that Greece would be forced out of the euro zone, the country's cost of borrowing would skyrocket, and investors in Greek stocks would be wiped out.

This might not be doomsday
But the story has more layers than the U.S. media have been reporting. And in this level of detail, we're beginning to find investment opportunities, thanks to some keen insights from our new friends at Proton Bank and the Investment Bank of Greece.

Of course, if you've been following along at FoolGreece2010.com, you already know about our change of tune. Within a mere 24 hours, we went from Nate "the Snake" Weisshaar predicting a major currency devaluation (and all it entails) to Joe Magyer saying he thinks Greece's debt-reduction efforts are more likely to succeed than fail. Our analysis is evolving as we're getting information that we just couldn't get sitting at our desks at Fool HQ.

Take this observation from a broker at Proton Bank: The company's customer mix is changing. Large mutual funds with investment committees aren't taking his calls anymore -- but he's suddenly become very popular with the hedge fund and private-equity crowd. Let's consider why.

They'd better look good
There's a well-known phenomenon in the mutual fund industry called "window dressing." This occurs when fund managers sell the stocks they don't think investors want to see them holding and buy the stocks they do. So Greece, a country whose financial crisis has been in the news almost every day for two months, has become unpopular with mutual fund managers.

But for better or worse, hedge funds and private equity don't have to disclose their holdings -- so those managers don't have to care what their investors think about their holdings. And what we're hearing, though we have to verify it, is that Greece has become very popular among this savvy group of investors.

For more on why a Greek recovery could be in the cards, check out Nate "the Snake" Weisshaar's column from yesterday, "Greece and the Euro: Down but Not Out."

Our next steps
I emphasize could because there are still so many moving parts. No matter what happens, the Greek economy will probably contract or show no growth over the next one to two years as the government's austerity measures -- tax increases and public sector pay cuts -- reduce consumer spending. We also don't know what kind of debt relief Greece might receive, though recent rumblings have it coming from a European-led consortium, with the IMF playing a small role to provide political cover for German Chancellor Angela Merkel.

Finally and most importantly, we need to determine the size of the problem here. We've heard from multiple sources that Greece's black market, or shadow economy, accounts for 25% to 50% of all economic activity here. That's huge! We've met taxi drivers, olive merchants, and even restaurant workers who haven't given us receipts for our purchases -- a problem that reportedly extends to white-class professionals such as doctors and lawyers. Incredibly, according to the Investment Bank of Greece, 95% of Greek taxpayers declare less than $40,000 in income.

One line of thinking here is that if the government can figure out how to tax the tax evaders (and it's trying to implement an incentive system for receipts), Greece's tax revenue would jump significantly, easing its budget woes. If it works, this would be a relatively painless improvement for the country -- and one that could cause the world to reassess its opinion of Greece.

That's what we're already doing, so stay tuned to FoolGreece2010.com to learn more as we do.

Tim Hanson

Tim Hanson is co-advisor of Motley Fool Global Gains and has traveled extensively in Europe, Asia, and Latin America -- though never before to Greece. Fortunately, he has experience dodging protests (working and living in Washington, D.C., is good training) and is overjoyed that a weakened euro has strengthened his olive-buying power at the Athens Central Market.


Read/Post Comments (6) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 25, 2010, at 4:40 PM, PositiveMojo wrote:

    This is a repeat of Mexico in 1982 and is nothing new or historic. The result was a de-valuing of the Peso and rescheduling the national debt.

    In January of this year you could buy one Euro for $1.45, today you can buy a Euro for about $1.33. While this is not dramatic it is indicative of a downward trend over the past 6 months. They will reschedule the debt - they have no choice. The other European countries are joined at the hip because of the Euro, so they all take a hit. They are no longer free agents.

    I wonder if Germany is regretting the common currency?

  • Report this Comment On March 25, 2010, at 9:46 PM, xetn wrote:

    I think the EU will eventually self-destruct, along with the Euro. Most follow the formula of more government equals greater gdp growth. While this may be true, that does not equate to real, sustainable growth. Real economic growth relies on saving and investment leading to capital formation. Government spending can only take place by taking from the private sector (consuming capital). Inflating the money supply destroys any incentive for private saving due to lost purchasing power.

  • Report this Comment On March 26, 2010, at 2:15 AM, greek123 wrote:

    It's about time this whole Greek thing was put to rest. Yes Greece has a national dept the size of the moon and no it was not created within the last 2 months that we are in the news. I think it is at least hypocritical of all the europeans to play up our debt situation, because more than half of that debt has returned in their pockets through purchases of military supplies, olympic games overcharged services and public works done by european consortiums composed largely of northern european companies. A large percentage of the german used cars ends up in the european south, giving room for new production in Germany, large chain supermarkets from northern europe do business in Greece with much larger profit margins than their home country and lastly every summer all the northerners flood Greece and the islands seeking to do holidays in the sun at half price of what it costs to stay at home. The problem is that you can not always take money out of a community because eventually it runs out. Sure we have our own problems too, with a huge ineffective public sector that is used to reduce unemployment and not to serve the public, while our private economy is small and not innovative enough to bring in any serious foreign investment but that is also nothing new to the last two months that we dominate the news.

    As far as investing here, there are opportunities at this time but you have to do your homework because the stock exchange here is small in daily volume, fragile and easily thrown about. The opprtunity especially now is here just be a bit careful

  • Report this Comment On March 27, 2010, at 8:06 AM, MNU34 wrote:

    Did I miss something here?

    Is the vacation in Greece for free for people from the North, because they pay the EU subsidies for Greece?

    Is the Greek consumer forced to buy used German cars?

    Should foreign companies pay to be so fortunate to deliver projects in greeece, just because Grrek companies do not find employees sice eveyone wants to be self employed in order to avoid to pay taxes?

    Is there any barrier for a Greek supermarket chain to enter the UK? OK, other than that you have to compete and eventually pay taxes?

  • Report this Comment On March 27, 2010, at 12:48 PM, mountain8 wrote:

    Simply put, Greece is too big to fail and will be bailed out; as will Spain and Portugal. All to the detriment of the whole people of Europe.

    When they do fall, as they probably will when the world realizes these bailouts do more damage than help, the world's economy will fall with them.

    Vot no to incumbants.

  • Report this Comment On March 29, 2010, at 6:10 PM, ViolentCapital wrote:

    wow, you guys talk about going into greece for shorting ideas??? A whole trip to Greece for shorting ideas only to turn so quickly change your tune to going long??

    I mean where does it say anywhere in Global Gains or Inside Value that you will exploit overvalued companies?? Or even Special Ops.

    Save me the marketing chicanery!

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