Greece's Anti-Bailout Brigade Is Here to Stay

When Alexis Tsipras, the 37-year-old leader of Greece’s leftist Syriza party, addressed supporters on Sunday night, he couldn’t hide his mixed emotions. His party had collected 27 percent of the vote, making it the second-largest party in the Greek Parliament. The total was six times more than what Syriza polled in the 2009 elections. And yet the enormous attention showered on Tsipras and his anti-bailout stance over the last month had raised expectations so high among party members that coming in second felt like a defeat. “We reached the well, but we didn’t drink any water,” Tsipras said.

In fact, Syriza has plenty to celebrate. Until recently a fringe party consisting of disparate elements ranging from ecologists and feminists to Marxists and Social Democrats, the party has transformed itself into a sophisticated and cohesive force. After it stunned Greece’s political class by winning 17 percent of the vote in the country’s first round of elections on May 6, Syriza discovered it had neither the party structure nor the organization to deal with this extra pressure. The leftists gradually pulled together, made their message more coherent, and displayed savviness in their dealings with the media. Tsipras, who a few years ago was being interviewed by school magazines, held his own in interviews with seasoned journalists from around the world.

This experience will stand Syriza in good stead as it prepares to take on the role of Greece’s main opposition party. The leftists face a tricky test. The coalition government due to be formed by center-right New Democracy, center-left PASOK, and the Democratic Left has suggested it intends to continue with austerity measures and contentious structural reforms such as labor market liberalization and the sale of public assets. Doing so may encourage Syriza to rally growing public discontent with the measures demanded by the European Union and International Monetary Fund—either through street protests or by trying to strengthen ties with labor unions.

Tsipras’s party, however, will have to tread a fine line. While Greeks are austerity-weary, they are also tired of uncertainty about their country’s future. They crave stability and are firmly in favor of remaining in the euro. If Syriza’s populism is seen as a cynical ploy to ruffle feathers and gain votes, the leftists could face a backlash from some of the Greeks who voted for Syriza on Sunday night.

With an untested coalition government having to rebuild trust with Greece’s lenders, while continuing its fiscal adjustment program and seeking a way out of a deepening recession, Sunday’s election result is a gift to Tsipras and his colleagues. They have the benefit of burgeoning support without the responsibility of government. The world is unlikely to have heard the last of Syriza.

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Markets Deliver Sobering Response to Greece's Election

Greece got a little breathing room. The rest of Europe didn’t. Yields on Spanish and Italian bonds soared to euro-era highs and European stocks slumped on June 18, the morning after Greek voters gave pro-bailout political parties enough support to form a parliamentary majority.

The message was clear: Even if Greece has stepped back from the brink of a euro-zone exit, that hasn’t slowed the spread of the financial crisis across the region. Investors are now demanding 7.14 percent returns on 10-year Spanish debt, above the 7 percent threshold that forced Greece, Ireland, and Portugal to seek bailouts. Italian 10-year debt is at 6.07 percent. Depositors have withdrawn tens of billions of euros from southern European banks in recent months.

Even as European Union leaders sent post-election signals that they’d compromise on Greek austerity measures to keep aid flowing to Athens, there was more scary news from Madrid. The Bank of Spain reported that bad loans reached 8.37 percent of total lending in April, an 18-year high. With the Spanish government piling up more debt in the aftermath of a €100 billion ($126 billion) bank rescue agreed this month, “The probability is rising that it will be asking for a bailout for the sovereign,” says Craig Veysey, head of fixed income at principal investment Management in London.

Sandra Holdsworth, a fund manager at the Kames Capital unit of Dutch insurance company Aegon, put it in even starker terms, saying Spain was “doomed” to a bailout. “Only a move, or even a sniff of a move, toward a fiscal union will encourage investors back into problem countries on a long-term horizon,” she wrote in an e-mailed note.

Fiscal union, simply put, means that Germany and other northern European countries with strong credit ratings would accept higher borrowing costs so that troubled southern European countries could borrow more. Berlin is having none of it. In interviews after the Greek vote, a representative of the German finance ministry reiterated the government’s opposition to jointly financed debt instruments, such as euro bonds and shorter-maturity euro bills.

It’s not even clear how much leeway the Germans are willing to grant Greece. A spokesman for European Council President Herman van Rompuy told Bloomberg Television that the European Union would consider “some adjustment” in the austerity measures required for Greece to receive additional aid—which is urgently needed, as the government could run out of money by July 20. The International Monetary Fund issued a statement that it was “ready to engage with the new government.”

But German Chancellor Angela Merkel left little wiggle room, telling reporters on Monday before a Group of 20 summit, “There can be no loosening on the reform steps.” A spokesman for Merkel said she told Antonis Samaras, leader of the pro-bailout New Democracy party, by phone after the party’s narrow election victory on June 17 that she hoped Athens would honor its commitments under the current aid agreement.

Even if Greece gets additional help, its future within the euro zone is far from assured. A softened bailout package might allow Greece to reduce annual interest payments by €5 billion while extending the repayment period, analysts at Morgan Stanley said in a June 18 report. But they predict that won’t be enough to return the country to solvency. Athens has failed to meet targets for tax collection, state asset sales, and public procurement that were required under the €240 billion bailout package it has received so far.

With the economy mired in recession and unemployment above 20 percent, Greece has little hope of generating more revenue or attracting investment. “The election has solved little and in our view is actually just another iteration toward the risks of a euro exit,” Harvinder Sian, senior rates strategist at RBS in London, told Bloomberg News. “The adjustment path is likely to remain too much for Greece to bear.”

With reporting by Emma Charlton, Simon Kennedy, and Lukanyo Mnyanda of Bloomberg News

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A Hedge Fund Hunts for Greece's Hidden Gems

George Elliott is used to being treated as a curiosity. As founder of Naftilia Asset Management, the financier is raising money for a hedge fund that plans to buy nothing but Greek stocks. In March he met in London with an investment manager who within seconds of sitting down made it clear that he had no interest in wagering on Greece. He just wanted to hear about the hedge fund’s strategy, Elliott says.

Elliott responded by asking a few questions of his own, including whether the money manager had invested in Russia after its 1998 currency crisis, in Argentina 10 years ago after the nation defaulted on its debt, or in the Standard & Poor’s 500-stock index in March 2009 when the benchmark plunged to its lowest point in 13 years. In all cases, the answer was no. “Then you are not qualified to be discussing Greece with me because you have missed the best investment opportunities over the past 20 years,” Elliott says he retorted.

The money manager eventually agreed to invest in Naftilia’s Greek Opportunity Fund, says Elliott, declining to identify his new client. Once he starts talking about specific stocks, “then people start to get excited,” says Elliott, who’s been fundraising since October. “At the same time, we are extremely lonely. We are one of the few people out there feeling optimistic.”

Hard to imagine why. Greece is struggling through a fifth year of recession and has an unemployment rate of 21.9 percent. The Athens Stock Exchange has plunged 90 percent since the end of 2007. “There’s a huge uncertainty about the clarity and the sustainability of earnings” for Greek companies, says James Butterfill, a global equity strategist at Coutts & Co. in London. “If you have a very high-risk profile, then maybe you can pick out opportunities.”

Even so, Elliott, 39, has raised more than €50 million ($63 million) for the fund, according to a person with direct knowledge of the matter. He has not put any of that money to work, while waiting for the Greeks to get a government in place. On June 20 Antonis Samaras, leader of Greece’s New Democracy party, was sworn in as prime minister after political leaders agreed on a coalition that will seek relief from austerity measures tied to international loans.

Kostas Tsironis/BloombergElliott opened an office in Athens to scout for stocks

After studying money management at City University London, Elliott started his finance career in 1997 as an investment banker at Societe Generale (SCGLY). Naftilia manages about $400 million and runs hedge funds focused on the global shipping and nuclear energy industries. Naftilia’s main shipping fund, started in 2004, rose 29 percent in its first year and gained in the three following years before dropping 26 percent in 2008 and 20 percent last year, according to a person briefed on its performance, who was not authorized to speak publicly. Elliott was based in Dubai until he decided to open an office in his native Athens in October 2010. He has spent the past year and a half examining corporate balance sheets, building a network of contacts in government and the business community, hiring analysts from banks, and meeting with investors.

Elliott says he’s focusing on companies punished by the stigma of being in Greece that generate most of their business outside the country, and companies whose cheap share prices may make them attractive takeover targets. He will avoid banks. “When Argentina defaulted, they had incredible returns on the stock market but incredible volatility on the currency as well,” says Elliott. “If Greece remains in the euro, we think this is going to be an incredible investment opportunity.”

If Greece returns to the drachma, which Elliott says is very unlikely, investors can buy stocks even more cheaply. “If we go to the drachma again, there will be tremendous amounts of money to be made for speculators,” he says. That would also create hardship for Greeks. The National Bank of Greece estimates per capita income would drop by at least 55 percent in euro terms after the introduction of a new currency. “Whether we are going to take advantage of such a situation and try to make money on the back of a population that is really going to have a tough time is going to be a tough debate for me,” says Elliott. “I don’t know whether I would be able to do it.”

The bottom line: With the Greek market down 90 percent since the end of 2007, Elliott has raised more than $63 million to invest in stocks.

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