Is Greece Riskier Than Egypt?

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If you believe the credit default swap market, the answer to that question is "absolutely!" On Monday evening, insuring $10 million of notional Greek government debt against default cost $835,000 a year -- nearly twice the rate on Egyptian debt ($440,000). The CDS market isn't infallible, though. Is it really possible that a Eurozone member poses a greater credit risk than a poor North African country in the midst of a popular uprising?

Two numbers that equal real trouble
Not only is it possible, but it is looks highly likely. Two numbers are all it takes to show the gravity of the Greek sovereign's insolvency predicament:


Gross Government Debt as a % of GDP, 2010

Real GDP Growth Forecast for 2011-2015, Annualized







Source: International Monetary Fund.

With a debt-to-GDP ratio of 130% (and rising), Greece's fiscal position is untenable. There is no hope that the country will grow itself out of this impasse. As far as the possibility of plugging the hole through increased tax collection and belt-tightening, here's what Citigroup's Chief Economist Willem Buiter wrote in an 84-page report released in early January (emphasis mine):

Greece needs to run a (permanent) general government primary surplus of around 6% of GDP just to stabilise its general government gross debt-to-GDP ratio at the level of around 150% of GDP expected at the end of 2012... This means that additional tightening equal to 10% of GDP is needed over the next [few] years to just stop the gross general government debt-to-GDP ratio from rising in Greece.

If you believe the Greek government and people are capable of this, can I interest you in a luxury condo on top of the Acropolis?

What the technocrats are missing
Back in August 2010, I commented that it was "a near certainty that Greece will default on its debt, whether on a unilateral or negotiated basis." I have seen nothing since then that would lead me to change my opinion. The stratospheric cost of insuring Greek government debt suggests this may also be the market's consensus view -- if not that of the technocrats in Brussels, Frankfurt, or Athens.

However, one institutional investor manifestly shares that view, and it's getting ahead of the problem. Last week, Vienna Insurance Group took an unusual but wise step in writing down the value of its Greek government debt holdings by 25%. The writedown is immaterial to its results; its exposure to the five peripheral Eurozone sovereigns represents less than 1% of its investment portfolio. However, the news must have sent chills down the backs of French and German bankers, the largest foreign holders of Greek public debt.

Shares offered at a 72% discount!
For more evidence of investor concern, take the equity-raising that Greece's fourth-largest lender, Piraeus Bank, completed on Monday. Yes, the issue was ultimately oversubscribed, but the bank had to offer shares at a whopping 43% discount to the theoretical ex-rights price, which accounts for share dilution. The discount to the closing share price prior to the announcement of the issue was 72%. That's what it takes to convince international investors to own the common shares of a Greek bank these days.

Finally, the depressed book value multiples of major Greek, German and French banks suggest that the market is already pricing in a haircut on some of their assets:



Price-to-Tangible Book Value*

Alpha Bank (Other OTC: ALBKY.PK)



National Bank of Greece (NYSE: NBG  )






Deutsche Bank (NYSE: DB  )



BNP Paribas (Other OTC: BNPQY.PK)



Credit Agricole (NYSE: ACA  )



Societe Generale






*As of Jan. 31, 2011. Source: Capital IQ, a division of Standard & Poor's.

Compare those numbers to the multiples of leading Swedish and Swiss banks, which have relatively little exposure to Eurozone periphery sovereigns, and are indeed headquartered outside the Eurozone:



Price-to-Tangible Book Value*

Nordea Bank



Skandinaviska Enskilda Banken



Svenska Handelsbanken






 Credit Suisse (NYSE: CS  )








*As of Jan. 31, 2011. Source: Capital IQ, a division of Standard & Poor's.

With major French, German, and Greek banks already trading at depressed valuations, it's not at all clear that their shares represent a "short" opportunity, even with the expectation of a Greek default. My inclination is that the long side may -- may -- now be more attractive; one would need to take a hard look at the potential impact of a Greek default on bank balance sheets, then decide whether or not current prices offer a sufficient margin of safety.

If the bank stress tests are more stressful...
The repercussions for shares could play out on an accelerated calendar if the second round of European bank stress tests, scheduled for the first half of the year, includes a realistic scenario of a Eurozone government default. If it does -- and I'm not holding my breath -- you can expect dilutive share offerings from banks in Greece and elsewhere to follow.

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Fool contributor Alex Dumortier, CFA has no beneficial interest in any of the stocks mentioned in this article. You can follow him on Twitter. The Fool owns shares of National Bank of Greece SA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (10)

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  • Report this Comment On February 02, 2011, at 6:12 PM, prginww wrote:

    This article is right to the point, however, it omits the political "reality" of "protecting the Eurozone" which translated to financial language means: "I don't care as long as it is not in my term."

    With this attitude of sticking their heads in the sand, the politicians, particularly the Greek ones, but also the German and the French, are in fact wasting the only plausible option: Greece should leave the Eurozone and revert to the Drachma, and by that provide its economy with the necessary competitiveness vehicle. This will eventually (maybe), in the long term, bring the country back in shape.

    By ignoring the real issue with statements and acts in the spirit of: "Greece will not default", "We will assist our Eurozone partner", "Greece will not leave the Euro", the politicians are only augmenting the problem and their respective taxpayers' bill, of course.

  • Report this Comment On February 03, 2011, at 2:02 PM, prginww wrote:

    @ GeorgiMilev

    well said. i couldn't agree more. that's how politicians work, no matter what flag they stand behind.

    the thing that frustrates me is that now the EU is talking about setting up an even bigger European Financial Stability Facility that will have larger guarantees put on the back of the more solvent EU members (could be up to $750B). since when does the problem of overleveraging get solved by increasing the amount of debt a country that is NOT COMPETITIVE can have. it makes no sense and that's why the EU will ultimately fail.

    one reason that the EU doesn't want Greece to leave is because the Germans obviously want them to stay in the union so they can continue to reap the benefits of cheap exports. Germany is a powerhouse and artificially so... why would they want to give that up. sure, almost all their savings are going to the bailout fund, and ultimately to bailing out Greece, but why would they care about that when their short term profits and income remain high and are expected to continue to increase.

    which brings me off-topic, to a flaw I've noticed in finance (that u can see in many people and countries around the world); consideration for the long term is almost always overpowered by it's short term counterpart.

    well in the short term, yes this bailout fund will be great. it will allow Greece to continue to issue debt and avoid cutting expenditures and raising taxes (which it will ultimately have to do). therefore, growth and competitiveness in Greece won't all of a sudden hit a brick wall.

    if anyone wants to see real long term results from the whole Greek sovereign debt crisis, three things will more than likely need to happen. first, Greek bondholders will probably need to take a haircut on their principal. this will help Greece afford their principal and interest payments. then, Greece will probably have to leave the union and go back to it's currency (the problem is how to implement something like this... Greece can't operate under a strong EU currency one day and then all of a sudden drop to a low value Greek currency the next day). this will help competitiveness, but obviously won't solve all the problems. finally, Greece WILL (no probably on this one) need to address their policies on both unions and social welfare programs. they can't keep up their pension program, their socialized vacation give-away program, among others.

    if these three things happen, we could very well see Greece turn around and be one of the more competitive countries in Europe (no time frame on this, who knows how long it would take Greece to recover).

    either way, if these three things were implemented, all i have to say is sit back and watch the "waterfall of capital" flow into Greece.

  • Report this Comment On February 03, 2011, at 11:32 PM, prginww wrote:

    The consensus appears to agree that Greece is certain to default at 0.2% growth and debt at 130% of GDP.

    Egypt is held up as the standard for a risky investment at 5.7% and 74% respectively.

    Where does that put the US with 3.2% growth (Dept of Commerce, BEA Q4 2010 estimate) and roughly 14 Trillion of debt - 93% of GDP.

    According to Wikipedia the Debt to GDP numbers for the US have increased as follows:

    1980 33%

    1990 56%

    2000 56%

    2010 93%

    The combined economies of Greece and Egypt have a lower GDP than most US states and several of those states are near default.

    Either the debt numbers for Greece and Egypt are not that bad or someone is missing the real story.

  • Report this Comment On February 04, 2011, at 11:48 AM, prginww wrote:


    The situations of the U.S. and Greece are different. The U.S. has an extraordinary advantage in that the dollar is THE international reserve currency, the euro and is not. Furthermore, Greece does not control its monetary policy and cannot print money.

    This is not to say that the U.S. does not face a significant challenge with regard to its indebtedness and fiscal position; however, it has unparalleled flexibility as it grapples with the problem -- which it must do with real resolve. In any event, this problem is hardly unknown.

    Alex Dumortier

  • Report this Comment On February 04, 2011, at 9:05 PM, prginww wrote:


    What TMFMarathonMan says, it that US is "too big to fail" because it becomes everyone's problem.

    Greece and Ireland are not. And it is not about politics, but rather about how much of countries' savings are tied with the fate of the US Dollar versus the Greek bonds or the Irish banks debt.

  • Report this Comment On July 06, 2011, at 8:17 PM, prginww wrote:

    Guys, why have you not written about the catastrophe in Greece for so long? This is going to be some world changing stuff. This could be the first domino to drop... seriously.

    Anyway here is our considerably more recent take on the matter...

  • Report this Comment On July 06, 2011, at 8:17 PM, prginww wrote:

    @GeorgiMilev - the US is NOT too big to fail... see the last paragraph of the last article in the link I posted above. US is a madoff style ponzi scheme - nothing more.

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