By Pater Tenebrarum
Greek Stocks Reopen with a Thud
The Greek stock market very likely represents an emerging opportunity, as many stocks are sporting extremely low valuations these days. However, when we last discussed the Greek market, we pointed out that there was probably no hurry, and more importantly, that using ETFs to play the Greek market would pose a difficulty at the current juncture.
Greek ruins - Emblematic of the country's situation.
(Photo credit: Fondos7.net)
As we noted at the time:
"[…] at least one of the larger banks is reportedly in serious trouble. In any case, non-performing loans in the Greek banking system have recently streaked to a new record high, in parallel with the run on deposits. So the banks are certainly not healthy, in spite of having been recapitalized at great cost late last year and remaining in the ECB's good graces for now.
This makes a bit more tricky to play Greece via ETFs or similar index-tracker vehicles, all of which are certain to contain bank stocks as well. To be safe, one should probably wait for the upcoming verdict on the banking system situation, which is bound to become known soon."
This morning, the stock exchange in Athens reopened, and the Athens General Index ended the day more than 15% down (after initially plunging by almost 25%).
The Athens General Index (ATG) crashes upon the exchange's reopening, but actually manages to close above its previous lows.
The culprit were, indeed, bank stocks. In spite of having already declined quite a bit, banks still represent about 20% of the index. This is a parallel to the stock market in Cyprus, which also got clobbered very badly due to its banking components. Three of the five largest bank stocks in Athens declined by 30%, this morning, and were thus, "limit down". For example, National Bank of Greece ended at 82 cents/share on Monday, after trading at €1.20 prior to the suspension of trading at the end of June. An estimated €100 million in sell orders reportedly went unfilled, so there is presumably room for additional declines on Tuesday.
In spite of all this, the market ended the day well above the lows of 2012, when the ATG Index briefly traded below the 500 level. This indicates that market participants already view non-bank stocks in a slightly more positive light, in spite of the many risks that are obviously still extant. It should be noted that Greek citizens are currently not allowed to pay for stocks with money held in Greek bank accounts. If they have enough cash or have funds in a foreign account, they can pay with that, but any deposits at Greek banks remain restricted. The vast bulk of trading in Athens is currently done by foreign investors.
Negotiations Continue Amid Strikes, Economy Collapses
In the meantime, negotiations between the creditors and the Greek government continue. This week, taxes and privatizations are on the menu. The highly indebted state-owned Greek National Railway company (OSE) is probably the worst-run railway company in the world. In 2012, it was calculated that by shutting it down and simply continuing to pay all salaries, the government could actually save a huge chunk of money.
An OSE (Greek National Railway) train.
(Photo credit: Georgedes)
We're not sure if a buyer for this train wreck of a railway company can actually be found. Probably this will only be possible if labor laws are changed dramatically. Anyway, the railway's employees have decided to pick this moment to go on strike. Naturally, they don't want the company to be privatized. In Greece, a great many people still cling to the government fiction, which Frederic Bastiat described as follows:
"Government is the great fiction, through which everybody endeavors to live at the expense of everybody else."
This only works until one runs out of people to confiscate wealth from. As Margaret Thatcher is said to have remarked:
"The problem with socialism is that eventually you run out of other people's money"
The Greek government is way past this point by now. Naturally, no one wants to lose the perks they have gotten used to over the decades. In Greek politics, clientelism has been the rule for a long time. The support of certain voter blocs has routinely been bought with government largesse. Reportedly, this has, as of yet not changed under the Syriza government either, but the problem is, of course, that many in Greece now expect the taxpayers of other countries to continue to pay for it all. If a Grexit referendum were held in other euro area countries, it would probably become crystal clear that said taxpayers are not exactly amused by this notion.
Not only railway workers are on strike, but so are several thousand Greek medical doctors. The state-owned health insurance company apparently hasn't paid them since February. As a result of the long and ultimately fruitless period of negotiations the Syriza government has held with creditors (fruitless from Syriza's perspective, that is, since none of its demands have been fulfilled), the economic recovery beginning in Greece has been completely eradicated and replaced with an economic collapse of truly stunning proportions.
This morning, the Markit PMI for Greece for the month of July has been released, revealing a record contraction in the manufacturing sector:
Greek GDP and PMI - In July, the manufacturing PMI has plunged to 30.2, a record low.
As can be seen above, shortly before the election, manufacturing in Greece had finally begun to recover after several years of contraction. This smallish progress has been erased and then some - with absolutely nothing to show for it. Why railway workers believe this is a good moment to go on strike is slightly mysterious to us. It will not only worsen the situation of the Greek economy, but is certain to worsen their own position as well.
As Markit's chief economist Chris Williamson reports:
"July saw factory production in Greece contract sharply amid an unprecedented drop in new orders and difficulties in purchasing raw materials. The headline seasonally adjusted Markit Greece Manufacturing Purchasing Managers' Index® (PMI®) - a single-figure measure of overall business conditions - registered 30.2, well below the neutral 50.0 mark and its lowest ever reading.
Record contractions were registered for almost all variables monitored by the survey, including output, new orders, employment and stocks. There was also a record lengthening in suppliers' delivery times.
The drop in output in July was led by the capital goods sector, while there were also sharp contractions in the production of intermediate and consumer goods. The latest decrease in output was the seventh in successive months.
July's survey signaled the steepest drop in factory employment ever recorded during the 16-plus years of data collection. The decrease was the fourth in successive months, following marginal job losses throughout the second quarter of the year.
A lack of availability of supplies meanwhile contributed to a rise in average purchase prices, with the rate of cost inflation accelerating from the previous month to the second-fastest since September 2012.
In contrast, prices charged by manufacturers for goods decreased to the greatest extent for over two years, the rate of decline notably more marked than the moderate pace of deflation recorded during the month before."
It would be tempting to conclude here that things are now so bad, they cannot possibly get worse.
Greece has a difficult time ahead of it in order to climb out of the economic hole it is in. The 2014 recovery came too late and was too weak to impress voters, so they decided to go with Syriza. The outcome of this is certainly less than fortunate so far. And yet, if proper reforms are finally implemented, Greece undoubtedly has the potential to quickly recover again. However, the series of strikes that we have witnessed in recent weeks conveys the impression that the actions of a great many people in Greece are still largely dictated by wishful thinking. The danger is that the reform effort may fail again, simply because support for adopting reform isn't sufficiently broad-based.
(Charts by: BigCharts, Markit)