Greece - New paradigm or old problem?

Greece has come a long way in a short time. The economy looks good and business is booming. But is there a danger of declaring victory while the battle is still raging? Greeks are starting to argue that Greece is different and that excessive stock market valuations are justified. Many other countries have done the same in the past and lived to regret it. Brian Caplen reports.

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Stock market fever has taken hold in Greece. In Athens, taxi drivers and waiters are at the ready with their tips for the best stocks to buy - a classic sign of an overheated market. Almost everyone in Greece seems to have a view on the market these days.

In villages where old men used to sit drinking coffee all day, exchanging farming advice and scandal, they now frequent only cafes and bars with screens and all they talk about is the market. Then there is the island trader - a 20-something male who spends most of his days phoning his broker from the beach.

Even the clergy has the bug. A financial journalist recalls visiting a priest to discuss his forthcoming wedding and being showered with questions, not about the serious vows he would be taking, but on which shares to pick.

One in two Greek families now owns stock and the country is enjoying a consumption and investment boom fed by rising asset prices. The market has leapt 102% in the first 10 months of this year after an increase of 85% last year, massively more than any other European market, and notwithstanding a sell-off in September.

Market capitalization as a percentage of GDP is around 160%, higher even than in the US, and several times larger than equivalent markets such as Spain or Portugal. The median price-earnings ratio for the market is 55 times 1999 earnings and some small stocks have PEs of over 100. Many have been bid up in price, because of market rumours and speculation, by many thousands of percent. One Greek stock has increased in value by 11,815% this year and four others by over 5,000%.

Good news aplenty

First the good news. There are several sound reasons for the market's performance over the past two years. Inflation is at 2% for the first time in more than 30 years; growth is running at 3.5%, the same rate as last year, and is likely to continue at an equal pace next year (the European average is 2.2%); the fiscal deficit is 1.6% just a notch above the EU average but well within the Maastricht maximum of 3%; interest rates are falling and even Greece's total debt to GDP ratio at 105%, which is way above Maastricht's recommended 60%, is headed slowly downward.

The fall in interest rates below the psychologically critical 10% level is driving the stock market, encouraging Greek savers to take their money out of bank deposits and put it into equities - almost any equity would have been a winner in this latest bull run.

The economy as a whole has benefited from EU membership and the Third EU Framework support programme for large infrastructure projects. The latter provides funds annually at the level of 3% of GDP until 2006. Greece's low per capita income helps it qualify for EU assistance but with a black economy possibly as large as the official economy such help has a much greater effect. The staging of the Olympic Games in 2004 will provide another boost for the economy.

Most importantly perhaps, genuine corporate restructuring is taking place, as even the sleepiest Greek companies realize that they must make themselves more efficient as the full force of European competition will soon be coming their way. Most sectors are engaged in a process of restructuring involving mergers and acquisitions. Value is being released and stock prices have floated upwards. In this virtuous circle, capital raising is easy and stock can be used as an acquisition currency. Earnings-per-share growth in 1999 is 35.5%, once again easily the highest in Europe and double the US figure.

Privatization and liberalization have unleashed the Greek entrepreneurial spirit and business success stories abound. One is Goody's, a local fast-food chain, that has retained its dominant position in the face of competition from McDonald's. In August Hellenic Bottling Company which distributes Coca-Cola in Greece and the Balkans took over London-listed Coca Cola Beverages creating the world's second biggest bottling operation. Telecoms and energy have been liberalized and the privatization agenda still has attractive assets on it including water utilities and port authorities.

Political change

Greece's notoriously difficult trade unions have lost much their power, and employees are able to work much more flexibly than in the past. In November the world's biggest human resources company Manpower opened up shop in Greece following legislative changes allowing temporary staffing.

This legal change reflects the fact that politics have become less ideologically charged and more pragmatic, and whatever the outcome of next year's elections few observers see any radical change in the country's direction.

"There is a widespread tendency of not getting too excited about party platforms and ideologies as opposed to the much more heated climate of the past," says Costas Vrostopoulos, manager of equities research at Athens broker P&K Securities, in a report called A Look Beyond Convergence. "Instead voters focus on more down to earth issues and solutions that relate to everyday problems they face in their work, neighbourhood, their contact with the authorities etc."

In fact rather than looking different, Greece is starting to look normal. Greeks are worrying more about ordinary things such as the traffic problems in Athens.

Right now the politicians' most pressing issue is the rate at which the drachma should merge with the euro. The agreed parity is 353.1 drachma to one euro but the drachma has lately been trading at higher levels than this, so what is the correct level? There are arguments both ways: devaluing would help exporters, upset foreign bondholders of drachma debt and could be inflationary. Changing the parity to where the currency is now would do roughly the opposite.

Bad news too

That is the good news. However, no amount of restructuring can justify price rises of 11,000% and price earnings ratios north of 100. On any appreciation of fundamentals the market is overvalued and has to correct. The difficulty is predicting when.
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