Greece debt woes offer opportunity for investors but some are selling off stocks amid fears of a collapse

News - Funds

Written by Ray Clancy

Friday, 05 February 2010 09:40

Investors sold off stocks in Portugal, Spain and Greece and the Euro plunged yesterday as market fears over the fiscal problems of debt laden southern members of the euro zone widened.

The head of the International Monetary Fund called for painful steps to cut huge fiscal deficits across Europe, saying no country should be under the illusion it was possible to escape the financial crisis without paying the cost.

The Portuguese government’s defeat over a regional finance bill, a climb down by the Spanish government over pension reform, and protests by tax officials in Greece added to the woes of states struggling to cut budget shortfalls bloated by recession.

IMF Managing Director Dominique Strauss-Kahn said his organisation was ready to help Greece, which is under more pressure over its finances than any other bloc member, but expressed confidence the government would take the very difficult measures needed to deal with its fiscal crisis.

The Euro plunged to a seven month low against the Dollar as traders took the view that dismal public finances in the single currency area may hamper the region’s economic growth prospects.

European Central Bank President Jean-Claude Trichet said deficit cutting measures announced by the Greek government were ‘steps in the right direction’ and the European Central Bank approved of the goals which Greece now has to meet.

But the sell off is good news for those who see Greek woes as a good investment opportunity. Thierry Malleret, a leading economist who previously headed the Global Risk Network at the World Economic Forum, said Greek debt is good value.

‘We are buyers of Greek bonds. The situation is extremely bad and Greece is in bad shape. But it is not a contrarian idea anymore to buy Greek bonds as lots of people are saying the EU will never let Greece go. We find it inconceivable that Greece will leave the eurozone,’ he explained.

‘Greece has the potential for increasing tax revenues, no one pays tax there at the moment. It is a dire situation but manageable. Some people are overreacting, that’s why were buying Greek bonds,’ he added.

Schroders’ bond desk has been buying Greek bonds for over two months. ‘'The portfolio managers’ view is that at current spreads the return provided is balanced well against the risks,’ the company said in a note.

‘Current market pricing discounts a scenario where investors in 10-year Greek bonds would need to receive approximately 77% of their coupons and principal repayment to break even versus an investment in German bund equivalents. In other words a default that extinguished 23% of the contractual payments would still yield an investment return approximately equivalent to German bunds at today’s yields,’ the note said.