Stock Wars: The Troika Strikes Back
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In a period of austerity, the government of Greece struggles to revive their economy and return to the growth needed to solve their financial issues. Years of overspending, tax evasion, and an overly receptive bond market, have left the Balkan nation with a sovereign debt it cannot repay on its own.
With the help of the healthy nations of the Eurozone, Greece has not outright defaulted. But the demands of the Troika are considered harsh by many Greeks causing strikes and riots in the capital, Athens. With a stagnating economy the nation must try to rebuild and grow during a time of financial hardship.
As part of their ongoing austerity package, Greece has been slashing spending and trying to privatize state-owned industries. But backlashes from the people and from the unions have hampered their plans, not only because they oppose privatization, but also because no other companies want a privatized firm with such strong union opposition to their plans.
The latest from the Troika: a six day workweek and minimum wage cuts. It remains up in the air as to whether these will be put into effect. The government of Greece is in a rather difficult position. If they go along with every demand from the Troika, the people riot in the streets and more radical politicians get elected to replace the current parties in power. The most recent elections showed growing support for the left wing Syriza party and the right wing Golden Dawn party, as well as increased support for the Communist party.
If the government refuses the demands, the Troika threatens to cut off the bailout funds meaning Greece would almost surely default on its debts and/or be expelled from the Eurozone. All the negotiations are a game of chicken between the Troika and Greece as to what must be cut and when since neither side wants to see Greece collapse financially.
Despite all the pain the Greeks have suffered, they are not seeing much gain. Their economy is still contracting, unemployment remains in the double digits, and the country is unable to manage its debts. Greece is caught in a positive feedback loop where to cut its debt, it increases taxes and cuts spending sucking money out of its economy. This causes the economy to shrink further thus shrinking future tax revenues and perpetuating the debt crisis.
Most countries in a similar situation would handle this problem with some sort of fiscal and monetary stimulus. But Greece does not have control over the currency it uses and has nowhere near the funds to run an effective fiscal stimulus. To this extent Greece is caught in a hole where they cannot stop digging deeper and their recovery will be in the long term with much of it coming from outside sources.
Recapitalizations: Rounds 1 & 2
Holders of Greek debt were some of the hardest hit by the crisis and Greek banks were certainly large holders of the debt. National Bank of Greece (NYSE: NBG) has been writing down the value of its holdings and in turn has posted massive losses. This has shaken the bank to its core and necessitated capital injections from the government. But the government is working with borrowed money so every penny lent to the banks further damages the government's balance sheet.
In Greece the banks hold great political power and have been able to hold off an excessively dilutive recapitalization action. Instead the government took preferred stock stakes while NBG bought back other preferreds at a discount to liquidation. Many expect further recaps will be needed although it remains unclear just how much current stakeholders will be diluted.
One way to avoid the possible dilution of a coming recap at NBG would be to buy NBG Preferred (NYSE: NBG-A) instead. With its dividend suspended, the preferreds trade at less than 20 cents on the dollar but have recovered from their lows when they fell to nearly 10 cents on the dollar. Unfortunately for the preferred shareholders, the dividends are non-cumulative and the current state of the company suggests they will not resume any time soon.
Is Dryships in Shipshape?
Greece based shipper Dryships (NASDAQ: DRYS) finds itself facing a two pronged attack on its profitability. First, the company is based in a nation struggling with debt problems and economic stagnation. With the situation in Greece this condition will likely persist for as long as Greece is caught in its current trap. This shrinks demand for trade from the company's home country, a country that relies on trade and tourism for its revenues. The shaky financial position of Greece also lends itself to more radical changes in government creating more uncertainty for Dryships.
But not all of Dryship's problems are home based. A global economic slowdown has reduced demand for trade and overcapacity in the industry has ballooned. The company is now competing in an industry where demand has slid and supply has risen thus driving down prices, even on routes they would otherwise service.
However the company does trade at about a fifth of its tangible book presenting an interesting value play. Dryships has an uncertain and unstable future which demands a low valuation. While certainly high risk, the firm could produce decent returns for its shareholders if both the World and Greek economies recover within the next few years.
To Save Greece
With the current financial situation of Greece, the nation has exhausted its options for saving itself on its own in a timely manner. Greece is already being bailed out so a quick turnaround will have to come from another source. The healthier nations of the Eurozone will need to increase demand in their own countries for the economies of the periphery to recover. In Greece's case, tourism would increase, shipping demand would increase, and the collapsed real estate market would see more demand.
The Troika now has more tasks for Greece. Not only do they need to keep Greece from outright defaulting, but they also need to rebuild their own economies. With the resources possessed by the wealthier Eurozone nations this is possible. We are already seeing some bond buying by the European Central Bank in an effort to inject money and it is a positive step. But to solve the Greek debt crisis more of this will be needed as well as some possible fiscal stimulus in the more stable countries. This crisis will not be solved in a month or even a year but the Troika with the help of the rest of the Eurozone has the ability to fix the Greek situation, whether they do so is still unknown.
Alexander MacLennan does not own shares in any of the companies mentioned in this entry. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.