Songs of the Doomed

Songs of the Doomed?

With a tip of the hat to my favorite writer, this is either "Songs of the Doomed" or "Fear and Loathing in Athens."

Some of my Greek friends have suggested that I am too negative. I understand. What are we doing here if things are as we describe? The answer is quite simple; the Greek economy (and the economy in the Balkans) is expected to grow faster than Europe or the U.S. over the next five years. The caveat is, this crisis must end.

There are amazing opportunities in real estate, energy, logistics, financial services, health care, food and technology. The Greek workforce is among the most educated in the world. Despite the talk of Greeks not being hard workers, I find just the opposite to be true. Of course, there are exceptions, but do you think all of the workers at the DMV in the U.S. work hard?

Now for the reality ...

Greece is being starved to death by a lack of capital. End the starvation, and the economy will turn around very quickly. In this case, starvation is the NPLs. The non-performing loans are strangling the Greek economy. Not dealing with this problem will only mean the NPLs could increase by another €50 billion in the next year (the official total NPL number is €113 billion, the actual number is probably closer to €135 billion), the unemployment will be higher, the economy will keep shrinking and the risk of civil unrest will be heightened.

Greece and the EU have reached a deal. Yes, they have agreed to disagree and to postpone the discussion of non-performing loans to December. Why Greek government wants to prolong this economic crisis is beyond me.

The argument about NPLs boils down to two real examples. In the first one, Mr. X owns a building in central Athens. He has a mortgage on the building of €22 million. He is leasing the building for €410,000 per year to a multi-national tenant under a five-year lease. The bank has written the loan down to €11 million and would sell it for €9 million. We think the building is worth €4 million. Mr. X does not want to do anything because if he "sells" the building he will lose all of his money. Although Mr. X has already lost all of his money, he will fight to "get paid" because the bank cannot foreclose.

Another real world case is a dairy in Northern Greece. The dairy has been closed for four years. The brand has faded in the consumers' mind. The shelf space the dairy had in supermarkets has been taken over by the competition. The loan (and other obligations) on the property is €50 million. The bank will accept a 50% haircut. Management thinks it will cost €10 million to restart the plant. What is the plant worth? The €35 million (the purchase price, plus the investment to restart the plant) the bank wants? The plant is worth nothing. There are plenty of operating dairies in Greece that are looking for capital. Why do you want to start a dead brand?

These are not the worst examples by any stretch of the imagination. The amount of NPLs is growing daily. The banks continue to insist they be in charge of selling their NPLs, just like they have been doing for the past five years? Meanwhile investors seem to be willing to invest € billions more in order to have the banks solve the NPL issue. There is a complete disconnect with reality.

The banks have closed their capital raises last week. Alpha Bank sold stock at €0.04; the stock closed December 31, 2014 at €0.47. Eurobank sold stock at €0.01; the stock closed December 31, 2014 at €0.19. NBG sold stock at €0.02; the stock closed December 31, 2014 at €1.47. Piraeus sold stock at €0.003; the stock closed December 31, 2014 at €0.91. The stocks on average are being sold at 4% of the 2014, year-end price. Who is buying this equity? The last time the banks recapped themselves, they did so with the implied promise of the management of the NPLs. They are doing the same thing today ... invest your billions with us and you can have a seat at the table when we divide the spoils. What makes these funds certain that this will happen this time?

So what happened to all of the money that has been poured into the Greek coffers in the last five years? If you want the answer, go to the Swiss banks; there you will find your recapitalization. Greeks are among the largest depositors in Swiss banks.

We live in a world of endless information and no information. Articles and articles are written about Greece. Are any of them accurate? I am not sure, but I do know that the average Greek is being manipulated by the government's propaganda machine, and has no idea what is going on with the future of Greece. The Greek government keeps telling people they must fight to not sell the NPLs. Why? There is no logical explanation. The only feeble argument is that everyone will lose his or her homes. Facts do not back up their scare tactics. 80% of Greeks own their own homes; only 15% of primary residences have a mortgage. How does that equate to mass foreclosures?

As dire as this is, it can all be fixed. Greece can work. Sell the NPLs and watch the recovery.