The devil is always in the detail.
Last week’s frantic negotiations to save Greece from defaulting on its loans, and in the process trigger a wider eurozone crisis, had their roots in the fact that in order to allow the country to adopt the euro, there was some serious cooking of the books.
As Stewart Cowley, Old Mutual Asset Managers’ head of fixed income, points out: “Greece has run a budget deficit in double digits for years; the smoke and mirrors that got them into the European Monetary Union was precisely that – an illusion.”
But in the end, the real and less palatable underlying data has bubbled to the surface. The global economic crisis from which we are trying to emerge was also about the fact nobody really understood the underlying data – in this case, complex debt instruments. Also, in the race to make money, people found it easier not to look too deeply for fear of ruining a perfectly good party.
Many people feigned surprise when the true state of Greek finances became apparent, but as it turns out the markets were never really fooled. FTSE has had the country’s stock market on watch for declassification from mature to advanced emerging status since 2006.
Last week, www.investmentweek.co.uk reported the Greek President was attempting to blame speculators for the country’s woes. However, data revealed this was not the case. It turns out there has been no significant additional shorting of Greek government bonds over the last 12 months.
In return for the bailout, Greece will now be forced to address its fiscal problems, though this over simplifies the journey the country has to undertake. As M&G’s bond guru Jim Leaviss pointed out at the start of this year, investors could soon be faced with angry voters and wobbly governments.
There may come a point where the political pressure from demonstrations and strikes could see politicians preferring the wrath of the markets to that of the voters, even if this is inevitably only a short-term fix.
Greece has a working-age population of less than eight million people and requires $70bn of financing this year. The fact is, Greece could very soon be joining the ranks of the advanced emerging markets. Could it be the first of the first-world countries to be replaced by more successful emerging market countries? There is no guarantee any first-world country has to keep its place at the top table.
As has been pointed out many times over the last months, emerging markets like China have better fiscal balances than the UK and US.
With the growing popularity of emerging markets for retail investors, it is perhaps worth remembering the data we receive on them is not pure, even if it turns out to be better than that coming out of Athens.
But then again, opaqueness does provide opportunity. If you have a skill for bottom-up research there will be plenty of opportunity on both the long and the short side once you really look under the hood of many traditional and newly emerging market companies.
