Remember Greece? Back in 2011 and 2014, the small southeastern European country caused tremendous global financial instability and mounting concerns about the future of the European Union. Ironically, it wasn’t the greatest challenge to the bloc; Britain provided that. And with attention focused on Brexit, it’s been easy to forget about Greece and the large debt problems that have plagued the country in the past. But those debt problems never really went away; Greece still has way too much and dad to service and while there’s been some GDP growth in recent quarters, it simply isn’t enough to help the country sustainably pay back its debt over the long term.
This is obvious, but has become an easy to forget nuisance. Fortunately, the IMF is here to remind us of this financial problem, and the group did so at the end of last week. Political news from America drowned the story out, but diversions cannot last forever.
Until the rest of the market comes back to the Greece problem, we should learn a bit more about what the IMF is saying. The group has warned Greece’s debt is “highly unsustainable” and estimates its debt-to-GDP ratio will reach 275% by 2060. That ratio is absurd even for a country like Japan or America, but for a country that lacks control of its currency and is wholly influenced by foreign nations’ monetary outlook, it is impossible.
Greece has been looking to make a new agreement with creditors, many of whom hail from France and Germany. Sadly, no deal has been reached—a repeat of a very predictable story that has been coming from the Mediterranean for years.
Part of the problem is that Greece cannot grow “out of its debt problem,” as the IMF puts it. The level of economic growth the country would need to make its debt load sustainable is simply impossible given the country’s global position, demographics, and current indebtedness. A compromise with European creditors will need to be made.
Greek stocks have certainly priced the uncertainty in—although bears could argue the uncertainty is still not fully priced in. The Global X Funds Greece ETF (GREK) is down 54% over the last five years—but it recovered 12% in the last year. European markets are also up over the last year—the Euro Stoxx 50 ETF (FEZ) is up over 6% in the last year and is up 8% over the last 5 years. It seems hope has come to the continent—but has that hope overlooked the problems in Greece?
This risk is difficult to quantify and understand, partly because it involves political machinations that no analyst can predict or quantify. Many analysts will shrug and apply a valuation discount to European stocks based on the Greece problem and call it a day. But some will be brave enough to go deeper. Those who do may find surprising value or unpriced risks in both Greece and the continent as a whole. And when they find it, they will also find opportunity.