Why Greece is not yet out of the woods

Written by Walter Marlowe Saturday, 17 March 2012 18:10
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I don’t feel the need to debunk the Greek bailout – hundreds of financial journalists, analysts and economists have done that very well.  But because I am a director of an emerging market focussed banking consultancy, BankT&D Consulting ( I want to comment about  the Euro Zone wide financial crisis from a banking industry and bank solvency perspective.

Let’s look at the following table (courtesy of Investors Chronicle):

UK Bank Exposure Global Bank Exposure

Greece £  6.0 bn Greece £   167.7 bn
Portugal £13.1 bn Portugal £   230.7 bn
Ireland £77.6 bn Ireland £   830.4 bn
Italy £37.6 bn Italy £1,014.2 bn
Spain £57.5 bn Spain £   910.5 bn


The combined exposure of UK banks totals £190 bn and the aggregate exposure of “global banks” (the world’s major money center banks) totals £3 trillion.

If we posit the notion, solely for analytical purposes of course, that the Greek bailout has not resolved the Euro Zone’s financial problems and has not restored stability or credibility to Euro capital markets over the longer term then we have to think about the kinds of “hits” to capital that the world’s major banks are eminently susceptible to having to take.

If we think about write-downs of even only 25% of value being eventually required on Portuguese, Italian and Spanish debt we’ve got a problem! (I exclude Ireland for the time being on the basis that the Republic may be moving out of financial crisis territory).

I am particularly concerned by the situation because of the kind of complacency and denial that you can hear when you talk with bankers in Europe, the UK and the Gulf. Complacence and denial have long been identified as deadly traits for investors and that must also be true for bankers and regulators.

What is to be done? Said it before and I’ll say it again, remain alert, be cautious and keep your stops in place and keep them relatively tight, e.g. not much more than 15% on a trailing basis.

What Else? There’s an interesting, possibly valid anomaly and Theme that aggressive income investors might want to consider and no, it’s not those newly issued, deeply discounted post swap Greek bonds yielding over 11% in the gray market. The anomaly is Good Companies – Bad Countries.

Traded in the US as ADS’s and accessible through most UK broker platforms are Portugal Telecom (PT in New York) and Telefonica of Spain (TEF in NY). Both telecoms still have significant state ownership and both have been severely beaten down over the last year, see below for some basic stats.


PT: Price: $5.21         52 week hi /lo:  $4.95/ $12.69   Yield: 18%        Ex-Div Date: End May & Dec.

TEF: Price: $16.59     52 week hi /lo:  $16.18/ 27.31   Yield: 12.80%    Ex-Div Date: Beg. May & Nov.


What makes PT and TEF interesting are their yields and a reasonable expectation that their dividend levels will be maintained because base operating and financial performance will be maintained within an “effective range”. What supports this supposition?

  • The companies are utilities providing a vital service to business, government and retail clients in large numbers. Sure, revenues and net profits are going to be affected by the very poor economic conditions in their home markets but utilities are resilient and relatively stable in terms of operating performance, They are operationally (and financially) leveraged businesses and those are their principal risk factors
  • Both PT and TEF derive significant amounts of their revenues from strong growth markets such as Brazil and other parts of Latin America and this does contribute meaningful added resilience to revenues and net profits. Yes, the Brazilian economy has slowed and emerging markets are vulnerable,  but a positive factor for these companies is the continuing growth in the consumer economies of these countries and increases in telecoms penetration, revenue per customer and value / profit margin of telecoms services provided

For aggressive income investors both companies merit consideration and timing (re ex-dividend dates) use of stops and where possible selling covered calls can substantially mitigate risk.

Does either company have share price appreciation potential? Probably not over the next 18 months but,

  • if central bank provided liquidity buoys the equity markets then both companies could benefit from the “rising tide” effect of strongly or consistently up-trending  markets
  • It is also possible that in a market providing very low income returns from mainstream investments other investors will also come to see value here

In my next Blog I want to talk about two topics:

  • Investing themes and strategies for emerging and “frontier” markets
  • The Euro “LTRO” mechanism – the Euro Zone’s version of quantitative easing and the what I think is the profoundly negative impact this will have on the banking industry and the “socio-economy”

Walter blogs @

He is the author of the forthcoming Thematic Investment. 
Last modified on Saturday, 17 March 2012 18:26

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