After Clearing A Major Hurdle, Greece's Outlook Brightens

by: Stephen Percoco, CFA

In December the Greek government accepted, through a tender offer, €31.8 billion in face amount of its outstanding bonds at average prices of around 34 cents on the dollar. The tender, which was financed by the European Financial Stability Facility, reduced the country's outstanding debt by €22 billion, putting its overall debt level on a sustainable path, according to the IMF. This was the last hurdle in Greece's quest to receive a €34.4 billion payment from the Eurozone and the IMF, which was paid out later in the month.

Although Greece still faces many challenges going forward, investor sentiment has changed markedly this year. In the Spring, the yield on Greece's 10-year notes soared to 30.5% when Greece's failure to uphold certain terms of the bailout prompted the Eurozone to suspend bailout payments. Recently, with the bailout program back on track, the yield on the 10-year notes have traded below 11%.

A review of the recent developments in Greece is useful from three perspectives:

First, it can be a source of potential investment ideas.

Second, it should shed some light on the progress of the Eurozone toward solving the fiscal problems of countries on the periphery. Concerns about Europe's ability to address these problems has affected the performance of financial markets all around the world.

Finally, although every country's circumstances are unique, Greece offers one example of the impact of severe austerity measures on a country's economy and the time and effort required to improve competitiveness, restore its ability to service debt and create the conditions for sustainable economic growth. This review may prove useful as other countries, including possibly the U.S., come to face tougher austerity measures in the years ahead.

Greece's economic nightmare began in early 2008 before the global financial crisis later that year. It was actually preceded by nearly a decade of above average growth. Greece's economy benefited from the activity leading up to and including the 2004 Summer Olympic games, which were held in Athens. Yet, 97% of Greece's GDP growth from 2000 to 2007 was driven by public and private consumption that was financed increasingly by deficit spending. No wonder, then, that when the global financial crisis hit, debt financing dried up and Greece's economic situation became untenable.

The financial crisis laid bare the weak structural underpinnings of Greece's economy. Its bloated government bureaucracy was both costly to maintain and interfered with the efficient functioning of the marketplace. Pension payments were overly generous. Red tape made it difficult for new businesses to form and for established businesses from outside Greece to set up operations. Many professions, like pharmacists, lawyers, taxi drivers and others were protected by arcane regulations that kept prices high and promoted waste and inefficiency.

Despite having a well-educated population, Greece found it difficult to incubate, grow and attract companies in high value-added industries, which might have promoted economic growth and sustainable competitive advantages.

In areas where it did enjoy a relatively strong competitive position, like shipping, for example, Greece saw its position erode as more aggressive competitors from other nations captured new growth opportunities and increased market share.

Even in product segments that are uniquely Greek, such as feta cheese and "Greek-style" yogurt, the country had ceded profit potential to foreign companies. As a result, Greece holds only 28% of the worldwide market share for Greek feta cheese and only 30% of the market for "Greek-style" yogurt. It also has only a 4% market share in exported olive oil, because it exports 60% of its production to Italy in bulk, where it is re-branded as Italian olive oil and re-exported.

In order to address these structural problems, Greece first had to address the government's financial problems. This required getting its budget deficit under control. In the years leading up to the financial crisis, Greece's primary government deficit (which excludes debt service costs) averaged around 6% of GDP. By 2009, its primary deficit had ballooned to 10.6% of GDP. It has since dropped by 4.1 percentage points annually - to 5.0% in 2010 and 2.4% in 2011 - the fastest pace of fiscal consolidation in the developed world in quite some time. Greece's primary deficit is expected to drop further to 1.0% this year and move to a surplus position of 1.8% in 2013.

Still, it has taken longer than expected to close the budget deficit because the country has been trapped in a vicious circle: Steep budget cuts have reduced economy activity (i.e. private sector consumption and investment), which in turn has reduced government revenues, requiring even more budget cuts. Since the end of 2007, Greece's GDP has fallen by roughly 20%.

Beyond shrinking government expenditures to a sustainable level, the enacted reforms have been designed to promote the operating efficiency of the government and restore the country's competitiveness. Public employment will be cut by about 20% from 2010 to 2015 or roughly 150,000 positions. Pension and other social benefit costs have been reduced significantly. Wages in the public sector, including state-owned enterprises and local governments, have, in many cases, been cut sharply. For example, Public Power Corporation, S.A., which provides 70% of Greece's electricity needs and is 51%-owned by the government, has reportedly cut salaries by an average of 36%. The minimum wage has been reduced by 22%. Sub-minimum wages have been introduced to facilitate youth employment. Overtime premiums have been reduced by 20%.

Despite this sharp drop in wage rates, some economists estimate that wages still must fall significantly (on the order of 30%-40%) in order for the country's unit labor costs to become competitive vis-à-vis other EU member states. Data from the European Commission's annual macroeconomic database does not support this claim; but it is clear that the productivity of Greek workers is among the lowest in the EU because the majority of its businesses lack large-scale operating efficiency. Compared to most other EU countries, a higher proportion of Greeks work in very small, usually family-owned businesses.

Beyond redundancies, wage cuts and pension reform, the Greek government is seeking to improve productivity and efficiency in other ways, including revamping the tax system and improving administration to both broaden the tax base and raise tax yields; improving procurement, updating administrative systems and controls; reducing the cost of delivering health care and introducing reforms in key sectors, such as retail, energy, transport and regulated professions, to increase competition and improve price flexibility. At the same time, Greece is seeking to reduce the administrative burden on businesses (to replace "red tape" with a "red carpet") and encourage more business formation and foreign direct investment.

Most of these initiatives are multi-year efforts. The initial success in reducing the government's deficit was achieved by picking the low hanging fruit. Long-lasting improvements, especially those that promote growth, are much harder to come by. In one sense, it is fair to say - without minimizing the severe effect of these budget cuts and policy reforms have had on individuals and businesses - that many of the government's accomplishments to date have been due to cost cutting, which is easier to achieve than growing the economy.

Official estimates from the IMF and others suggest that Greece's GDP will fall by 4.0% in 2013 before flattening out in 2014. Returning to growth on a long-term, sustainable basis is the main objective and ultimately the true test of this extraordinary restructuring initiative.

In a report entitled "Greece 10 Years Ahead", McKinsey & Company has identified a number of key economic sectors that can provide the foundation for a return to growth. The consulting firm first identified those major sectors which play to the Greek economy's inherent strengths. Then it identified the "rising stars": sectors that are in niche areas with better than average growth potential.

According to McKinsey, the major sectors with growth potential include tourism, energy, food processing, crops agriculture and retail/wholesale trade. Tourism accounts for 15% of the country's total economic activity, but Greece lags behind countries such as Spain, Italy and even Turkey in capturing its fair share of tourist spending, especially from Asia. Energy is important because Greece is a relatively inefficient consumer and improved efficiency can bolster the competitiveness of industry. Food processing already has large-scale producers, but the sector still has growth potential in oils, dairy, bakery and fruits & vegetables, in part by establishing global marketing initiatives and brand names to capture more of the value-added in the retail price. As evidence of the potential here, Unilever has said that it will open a number of food processing plants in Greece over the next few years. Crops agriculture, on the other hand, is more fragmented but still accounts for 13% of employment; growth is possible by increasing operating scale and pursuing a more focused strategy in key export markets. Likewise, in retail/wholesale trade, Greece has many "mom-and-pop" retail stores, so there is the potential to improve efficiency by scaling up operations within the country.

McKinsey's rising stars include the manufacturing of generic pharmaceuticals, aquaculture, medical tourism, elderly care, regional cargo hub development and waste management. In regional cargo, for example, the port of Piraeus provides the quickest access for exports into the Balkans and eastern Europe. Hewlett-Packard recently announced that Piraeus will be its distribution hub for these geographic markets.

McKinsey's strategic plan appears to offer a good balance between playing to Greece's existing strengths and pursuing the development of related businesses where Greece can achieve competitive advantage in a reasonably short time frame. Like most other countries, however, this strategy seeks to build stronger export businesses. This is a common goal for many countries across the globe. Given the softness in the global economy, however, competition for exports is especially stiff. It remains to be seen just how quickly an export-driven strategy can achieve success.

Besides the McKinsey road map, Greece is pursuing other avenues for growth, improving efficiency and reducing debt. One of the most promising efforts is its privatization program, which is being conducted by the Hellenic Republic Asset Development Fund (HRADF), an arm of the government. Greece still holds major equity stakes in its electric, gas and water utilities and also Hellenic Petroleum, all of which are up for sale.

To date, the privatization program has been delayed, in part due to political opposition, but also because potential price realizations have been lower than anticipated. Nevertheless, HRADF is moving the program forward. It may offer financing to qualified bidders as a way of bridging the gap between what the Greek government thinks the assets are worth and what buyers are either willing to pay or able to finance. Conceivably, as suggested by Komal Sri-Kumar of TCW and others, potential buyers may be able to pay for a portion of their acquisitions by purchasing Greek sovereign bonds at a discount in the open market.

Greece has also established a public company, Ellinikon SA, to pursue the development of the former airport site, located several miles south of Athens. The site offers views of Athens and the acropolis as well as the Greek islands. Over the next few decades, if plans go forward, Ellinikon will become a major tourist and residential center, with one or more world class resorts, a marina and many types of residential units (e.g. high rise and mid-rise condominiums and single-family units).

Ellinikon is clearly a choice land parcel, but the start of development may be delayed until the real estate market shows improvement. By some rough estimates, as many as 200,000 housing units are vacant and house prices have fallen by 30% to as much as 50% in some areas. Mortgage financing, for the moment at least, is almost non-existent.

Beyond the cost cutting, efforts to foster economic growth in Greece may take time. If the economy does not begin to grow until 2015, as projected by the IMF and others, the political pressure for Greece to exit the Euro may increase. Some economists believe that projected annual GDP growth of around 4% in 2015 and beyond is not achievable and therefore the country will face at least another round of debt restructuring.

On the other hand, it is possible that the initial rebound in the Greek economy may happen sooner than official projections suggest. The chart below shows that the Athens stock market, reached a post-crisis low in early June of this year (down more than 90% from its peak in November 2007), after the Eurozone decided to hold back bailout funds when it became clear that Greece was not living up to the terms of its austerity program. Since then, however, as the country has moved back into compliance, its stock market has bounced back sharply. At Friday's close, the Athens General index is up 115% from that June low. So far in 2013, the index is up 11.6%.

Improving sentiment is also evident in Greece's bond market. As already noted, the yield on its 10-year notes has fallen from 30.5% in June to less than 11% currently. Consequently, the price on the 10-year notes has nearly quadrupled from 13.5 (percent of par) to 52.6 over that same time frame.

The four Greek banks which tendered an estimated €12 billion of bonds should realize an estimated €1 billion or so in profits (from their average marks of around 25). They may also be able to convert a significant portion of their tendered bonds into cash, which will help re-liquefy the financial system and eventually reopen the loan spigot to businesses and consumers.

Greece's economy has also gotten a boost from the release of the €34 billion in bailout funds to the government. Of this amount, an estimated €24 billion was used to inject capital into the banking system and €8.3 billion to pay past due bills. To put this payment in perspective, the €34 billion represents about 17% of Greece's anticipated 2012 GDP. The payment of past due bills alone represents 4% of 2012 GDP.

It is not hard to imagine that the withholding of this €34 billion payment had a negative impact on Greece's GDP. Those businesses and consumers who would have received those funds undoubtedly had to cut back on their spending. In fact, the withholding of the payment probably had a negative multiplier effect on the overall economy.

Given the payment delay, it is surprising that Greece's GDP did not fall by more than the reported 6.9% in the third quarter. Said another way, had the payment been made on time, the drop in third quarter GDP would probably have been much smaller. Conceivably, the release of the funds on time could have sparked a smaller than anticipated decline in GDP in the second half of 2012, which might have caused consensus estimates for the performance of the Greek economy to be revised upward. With the release of the payment in December, the boost to Greece's economy will probably show up in the first half of 2013. Some economists may recognize this as a temporary boost, however, so the key to future sentiment about Greece's prospects will probably hinge upon its economy's performance in the second half of 2013.

Even so, by bringing its austerity program back on track, the Greek government has demonstrated convincingly its intention to remain with the Euro. Even if current projections do not reflect the pop from the release of bailout funds, the worst is probably over. If so, the country may begin to look forward to improved economic performance in the months ahead. It is possible that Greece may not begin to grow for another year or so, but the rate of decline should slow from here. Barring a collapse in Europe's economy or a persistent inability for Greece's economy to show improvement, we believe that there is little doubt that Greece will keep the Euro.

As more of its people become convinced that Greece will remain within the Euro, a growing portion of the funds that were sent abroad over the past four years should begin to flow back into the country. That siphoning off of liquidity has undoubtedly contributed to the country's very weak economic performance from 2009-2011. Consequently, the flow of funds back into the country should provide another boost to economic activity.

So with the profits on stocks and bonds, the conversion of sovereign bond holdings to a more liquid form (through the recently completed tender offer), the bailout payments and the potential repatriation of funds, it is a good bet that Greece's economy will get a jolt that should help it to perform better than the anticipated 4% decline in 2013.

Yet, it is also clear that Greece still faces significant challenges in its quest to improve its economic competitiveness. Restoring long-term growth will not be an easy task. Yannis Stournaras, Greece's finance minister, acknowledged as much in a recent New York Times article, saying that the agreements which led to the release of the bailout funds are no cause for celebration. "Now," he said, "the hard part begins."

Investing in Greece

There are two primary ways for U.S.-based investors to invest in Greece. One is the Global X FTSE Greece 20 ETF, which trades on the NYSE Arca exchange under the ticker symbol GREK. (Information on GREK is available at This ETF was launched on December 7, 2011, making it just over one year old. It is designed to replicate the FTSE/ASE (Athens Stock Exchange) 20 Capped Index (FT/ATH), which tracks the performance of the twenty largest stocks listed on the Athens Stock Exchange. The FTSE/ASE 20 Capped Index is a subset of the broader Athens General Share index (ATG). At last check, GREK had 1.25 million shares outstanding. At the February 11 closing price of $19.38, the ETF had a market value of $24.2 million. Its annual fund operating expense is 0.71% of net assets.

When first launched, this ETF underperformed its benchmark by a couple of percentage points. Since then, its performance has more closely tracked the FTSE/ASE Capped 20 Index. Its top five holdings include Coca-Cola Hellenic Bottling Company, Hellenic Telecom, National Bank of Greece, OPAP (a gaming company that also runs the country's lottery) and Public Power Corp. The Greek government still holds significant equity stakes in three of those five companies (Hellenic Telecom, OPAP and Public Power Corp), all of which stakes are potential candidates for sale.

From a technical point of view, the Athens General index rallied from a low of 471.25 on June 5, 2012 to a recent high of 1052.83 on February 8, 2013, a gain of 123% in just 35 weeks. Most of the gain anticipated the resolution of issues between Greece and the Troika (i.e. Eurozone finance ministers, the ECB and the IMF) which led to the release of the bailout funds. The rally more than made up for losses suffered by investors earlier in the year. After such a strong rally, however, the index is due for a pullback.

Overall, the index's trading pattern since the June 5 low has been positive. Since the index has risen above the February 2012 high of 847.63, there is a good chance of further upside, perhaps eventually to 1400-1500, which would represent a gain of 40%-50% from the current level.

Over roughly the same period from June 2012 to February 2013, FT/ATH has underperformed the ATG with a gain of "only" 95%. By definition, FT/ATH has the 20 largest capitalization stocks on the ATG, many of which are government-sponsored and therefore less risky than the overall market. On the other hand, FT/ATH also has a very high weighting in financials (34.5%), which have been riskier. Over a longer stretch, the performance of the FT/ATH has tracked the ATG reasonably well.

In October, GREK's largest holding, Coca-Cola Hellenic Bottling Company (which also trades as an ADR on the NYSE and on the London Stock Exchange under the symbol "CCH") announced that it planned to move its primary listing from the Athens Stock Exchange to London. CCH also plans to move its headquarters from Athens to Switzerland. CCH has significantly outperformed the ATG since the 2007 market peak, primarily because it is one of only a few Greek multinationals, with operations that stretch from the U.K. to Siberia. Some ETF analysts think that if CCH moves its primary listing to London, then Greece might be recategorized as an emerging market economy for investment purposes. For now, Global X, the sponsor of GREK, expects that CCH will remain in the FT/ATH, but it acknowledges that CCH's removal might have an adverse impact on GREK's liquidity and performance.

We think that GREK is a reasonable proxy for the Athens stock market, but its small size ($24.2 million market cap) and relatively small number of holdings, combined with the uncertainty of the future performance of the Greek economy make it a speculative bet.

The second way to gain exposure to a potential rebound in the Greek economy is through the purchase of individual stocks that are listed (or trade) in the U.S. Unfortunately, here too there are only a few investment choices.

As a rule, we prefer to invest in ADRs that are listed on an exchange (e.g. NYSE and Nasdaq). Listed stocks typically have greater liquidity. Companies whose stocks are listed are also required to file their financial statements and notices of major corporate events with the SEC.

Many foreign stocks also trade on OTC Markets (, which used to be called the "pink sheets." These unlisted stocks have five-letter ticker symbols. Most companies whose stocks are unlisted do not make SEC filings. You might still be able to obtain their financial statements from their websites or other venues; but it is often more difficult to get financial information on unlisted securities.

A list of Greek companies whose stocks trade as ADRs in the U.S. is available at, the ADR web site for Bank of New York/Mellon, one of the largest ADR sponsors. That list shows that only three of the 21 Greek securities trade on a U.S. exchange (in this case, the NYSE). Two of the 21 trade on the London Stock Exchange. The remaining 16 trade on OTC Markets.

The three listed stocks include Coca-Cola HBC, which is discussed above, and two securities of the National Bank of Greece SA:- its common stock (NBG) and Series A Preferred Stock (NBG-PA).

The National Bank of Greece was founded in 1841 and has been listed on the Athens Stock Exchange since 1880. It is the largest of the four largest remaining banks in Greece. (If it completes its proposed all-stock merger with Eurobank Ergasias SA. NBG will form NBG Group and the four will become three.) NBG had also agreed to acquire Emporiki Bank, which was owned by Credit Agricole, but the deal apparently fell through. Emporiki was sold to Greece's Alpha Bank on February 1, 2013.

In addition to its home market of Greece, NBG has operations in southeastern Europe, Turkey and several other countries. The Eurobank merger will increase its operating scale, especially in Greece and southeastern Europe and provide significant cost saving opportunities.

After reaching a high of $64 in late 2007, NBG's stock fell almost steadily to a low of $1.12 in June of 2012. It then rebounded to a high of $3.25 in October, but has since dropped back to the current level of $1.50. The stock therefore rebounded along with the Athens stock market last summer, but it has meaningfully underperformed the market over the past several months.

Similarly, NBG's Series A Preferred traded mostly in the $20-$21 range from late 2009 until early 2011, but it plunged to a low of $2.75 in late 2011 as the Greek sovereign debt restructuring took shape. The Preferred revisited the $2.75 level in June, but it has since recovered to $7.50-$8.00 range, closing at $7.83 on February 11.

NBG, like the other Greek banks, was a big holder of Greek government bonds. It was required to accept a principal reduction of 53.5% in March 2012 on its holdings, as part of the country's restructuring agreement. Those new bonds were marked, according to the Bank's Deputy CEO, at 25 cents on the euro. Thus, NBG lost roughly 88% of the value of its investment in Greek sovereign bonds, which was reflected in its 2012 first quarter financial statements. Those losses, along with other loan loss provisions that followed from the sharp contraction in Greece's economy since 2007 gave the bank a negative equity book value.

The write-down on sovereign debt wiped out the capital positions of many Greek banks, including NBG. As a result, the banks suspended the issuance of their financial statements after the 2012 first quarter, pending the release of bailout funds from the EU and IMF, a large portion of which were earmarked for recapitalizing the banking sector. The Greek banks caught up on their financial reporting with the issuance of second and third quarter results on December 21.

The release of bailout funds gave the government €8.3 billion to catch up on past due payables and €24 billion to "refloat" the banking sector. Taken together, these funds helped the banks to replenish their capital and should also allow many of NBG's customers to catch up on their loan payments.

Earlier in 2012, primarily as a result of €11.8 billion in pre-tax losses suffered on its holdings of Greek sovereign bonds, NBG had a capital deficit of €2.2 billion and a capital adequacy ratio (CAR) of -3.4%. According to EU directives, the minimum required CAR is 8%. On May 28, the Hellenic Financial Stability Fund (HFSF) contributed 5 series of European Financial Stability Fund (EFSF) bonds totaling €7.4 billion as an advance on NBG's future share capital increase. The HSFS injected another €2.3 billion in December 2012. With the total capital injection of €9.7 billion, NBG's pro forma capital adequacy ratio as of September 30, 2012 was a relatively strong 11.9%.

In mid-November, Greece's Ministry of Finance set the proposed terms for the recapitalization of the country's banks. The banks will be required to issue common shares in an amount sufficient to bring their Tier 1 capital back above 6%. These new shares will be offered at a discount of at least 50% to the average price of the banks' common stock in the 50-day period preceding the share issuance. The balance of the required capital, sufficient to bring the Tier 1 ratio above the required 9%, can be issued as convertible bonds carrying a 7% coupon initially, rising 0.5% each year to a maximum of 9.5%. These bonds will automatically convert into common after five years. Investors from the private sector that participate in the share offering will also receive warrants to purchase common shares, provided that their collective participation amounts to at least 10% of the total offering. The HFSF will take up the balance of the offering not purchased by investors.

Shares of all Greek banks, including NBG, fell about 15% on the announcement. This is the primary cause of their underperformance (relative to the ATG) since October. Obviously, investors do not like to face the prospect of dilution. In this case, the Ministry of Finance apparently outlined terms that were more dilutive than the market was anticipating. Under the circumstances, we hope that the MofF will treat existing bank shareholders better.

The proposed recapitalization appears to be structured in a way that allows the Greek government (through HFSF) to buy bank shares at the same price as offered to the public. If so, we think that this is a mistake. Given that the government was a major contributor to the current plight of the banks, its goal ought to be to provide bridge financing only. It should not seek to make a profit on any shares that it purchases in the recapitalization. The market probably assumes that the government will get the same proposed 50% discount as the public.

Instead, we think that the government should buy shares at a higher price: hopefully, a price that it thinks the bank's shares can eventually reach. In NBG's case, let's say that this price is €5, well above the current level of €1.12 ($1.50). With its €9.7 billion investment, the bank's pro forma Tier I capital stood at roughly €7.4 billion (apparently after erasing a €2.3 billion deficit) and its pro forma Tier I capital ratio was 10.3%, above the minimum of 6.0% and the target of 8.0%. So a 7% pro forma Tier I would require the issuance of roughly €5.0 billion of new equity. This calculation does not reflect any potential fourth quarter loss, which could raise the amount of required new equity. It also does not reflect any extra capital which would be necessary to meet Tier I targets with the anticipated acquisition of Eurobank.

Ignoring the fourth quarter and Eurobank contingencies for now, if we assume that NBG is able to raise €1.0 billion (of the anticipated total need of €5.0 billion) from private investors at a 50% discount to the current share price, this would results in the issuance of 1.79 billion shares. The question then becomes, what happens to the remaining €4.0 billion, which will be held by the government (through the HFSF). If the government also buys shares at a 50% discount to the current market price of €1.12 ($1.50), then it will receive 7.14 billion shares and the existing shareholders, who currently hold 0.95 million shares, will see their equity stake in the bank shrink to 9.7%. Alternatively, if the Greek government buys in at a higher target price, under the theory that it should just get back what it puts in, since it caused this mess in the first place, then, then existing shareholders will see substantially less dilution. For example, at a buy-in price of €5.00 per share, the government would get 800,000 shares for its €4.0 billion investment and existing shareholders would end up with a 28% equity stake in the bank.

The same thing could be accomplished if the Greek government holds its €4.0 billion investment in the form of a preferred stock that pays no dividend and is redeemable at par. That preferred could be redeemed with the proceeds of future equity offerings to private investors presumably at higher prices. Obviously, this is speculation on our part, but this approach makes sense and is much fairer to existing holders, who were harmed by the restructuring of the Greek government's debt. This approach would also be more attractive to new investors in NBG.

NBG's Series A Preferred may also be a worthwhile choice here. In 2008, NBG issued $625 million (or 25 million shares at a $25 per share liquidation value) of the Series A Preferred. The Preferred's $2.25 non-cumulative annual dividend has been suspended. It has no governance rights, despite the suspension of the dividend. Yet, the company bought back $47.5 million of the issue in a January 2012 tender (presumably at a reasonably big discount). Under the recapitalization plan, none of NBG's outstanding preferred issues will count towards meeting its capital requirements. The Series A Preferred is callable at par in June 2013. Conceivably, NBG could make another tender offer for the Preferred as its prospects improve. As already noted, the Series A Preferred currently trades at $7.83. Its future performance will almost certainly mirror the common, whether or not NBG's financial performance improves.

At the current price of €1.12 ($1.50), NBG's common stock represents a call option on the bank's (and existing shareholders') survival. Given that the recapitalization of Greece's banking system will occur without wiping out existing shareholders, it is a good bet that NBG shareholders will participate in the bank's recovery, even if their equity stake is ultimately diluted when NBG issues new common shares and convertible bonds to replenish its equity capital. We believe that the Greek government should (and hopefully will) restructure its recapitalization plan to limit its potential profit in favor of giving existing shareholders a greater chance at recouping their losses and new shareholders better upside potential This should help it to sell a higher portion of the equity offering to the public.

At this time, it is not clear whether NBG will seek to raise equity capital in the U.S., but given the size of its capital requirements, it probably will need to. NBG is clearly a speculative bet; but it may turn out to be a good long-term investment, too, if Greece is able to achieve its goal of improving the competitiveness of its economy.

A previous version of this article appeared in the Income Builder newsletter (Bulletin 1387, December 15, 2012).

Disclosure: I am long NBG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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