An Optimist Sees Opportunity

"A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty." (Winston Churchill)

Each New Year seems to bring about a renewed optimism (unfortunately that optimism has already disappeared on Wall Street).

Even I am beginning 2016 with the Greece glass half full. The weather is beautiful.

Also, S&P raised its long-term sovereign credit rating on Greece to "B-" from "CCC+," with a stable outlook, citing the country's compliance with its economic program.

Actually, there has been a major development, which did not receive much press coverage outside of Greece ... the election of Kyriakos Mitsotakis as head of New Democracy. After an aborted election in December it appeared that New Democracy was headed for oblivion, but now that Mitsotakis has been elected the leader, New Democracy is again a legitimate threat to the left-wing Syriza party.

Mitsotakis graduated from Harvard, received a masters degree from Stanford and a MBA from Harvard. He worked at Chase Bank and McKinsey in London.

The election of Mitsotakis does not mean New Democracy will come to power any time soon. In fact, it would probably be bad for Greece to change the government at this point. There are many prerequisites that need to be delivered in short order to continue to receive funding from the European Union. It is preferable to have Syriza in charge in order to fulfill their promises for cuts in pensions and other unpopular measures. If New Democracy came to power now, it could result in an even worse stalemate.

Actually, New Democracy may not come to power any time soon. There is a scenario that suggests Syriza may finally pressure the banks to start selling non-performing loans. If this process commences in the next three months, we could see fresh capital coming to Greece and a resulting improvement in economic prospects. If Syriza fights reforms, their days are numbered.

This good news unfortunately means little to the Greek banks. The amount of NPLs goes up each month and the banks continue to resist selling the loans, as they are not fully provisioned. Our estimate of a €70 billion shortfall is unchanged. The banks stocks are down an average of 30.8% since January 1, 2016.

The rumor mill is full of speculation about a solution for the NPLs. The high-end of the NPL range is speculated at 10 cents; the low end at 2 cents. The 2 cents is derived from a "supposed" offer by one of the funds to form a special purpose vehicle to "buy" €500 million of NPLs from one of the banks for €250 million. The fund would put up €10 million and the selling bank would "lend" €240 million. The fund would own 100% of the underlying equity and be paid a large management fee. The bank would pray they would recover some of their new €240 million loan. €10 million for €500 million of loans is 2%. I guess instead of "extend and pretend," we are "putting lipstick on the pig."

Back to Syriza... there seems to be movement on the part of the government to get serious about privatizations. The Astir Palace is in contract. The sale of the second half of the Port of Piraeus was just completed. The regional airports were sold. There are ongoing projects involving the privatization of the gas utility and the trains. It is late in coming and prices would have been better if these deals were completed a year or more ago, but they are being completed nonetheless.

Optimism was quickly fleeting in 2015 following the Greek elections. Let us hope the optimism has a reason to last a little longer in 2016.