Morgan Stanley: Sell 2023 bonds, buy 2042 paper // Greek bonds overstate restructuring risk, Cavallo says
Morgan Stanley: Sell 2023 bonds, buy 2042 paper
Morgan Stanley advised investors on Monday to sell Greek bonds due in 2023 and buy the nation’s securities that mature in 2042, betting the shorter-dated debt will underperform, should the nation’s economic position deteriorate.
“The front end of the curve has remained resilient,” Morgan Stanley strategists Paolo Batori and Robert Tancsa in London wrote in an investor report.
It’s “exposed to the same fundamental risks as the long end.”
Buying warrants with payments linked to Greece’s gross domestic product may provide a hedge for the trade, they wrote.
Bondholders are overestimating the risk that Greece will seek additional debt forgiveness or leave the euro after the country carried out the largest restructuring in history, said Domingo Cavallo, who led Argentina’s efforts in 2001 to avoid what would become a record sovereign default.
This month’s restructuring, which allowed Greece to write off more than 100 billion euros ($131 billion) in debt, provides the country enough relief to allow it to overhaul the economy, said Cavallo, who resigned as economy minister as Argentina defaulted on $95 billion in December 2001. European policy makers may lower the costs of the region’s loans to Greece if needed and will help keep the country in the euro, he said.
Yields on Greek bonds due in February 2023 rose above 20 percent last week for the first time since the government issued them as part of the debt exchange. Yields jumped to 20.1 percent on March 23 from 18.5 percent on March 12 as concerns mounted that the exchange didn’t cut debt levels to sustainable levels. The bonds’ price fell to 24.9 cents from 27.8 cents on March 12, according to data compiled by Bloomberg.
“If I had those bonds, I would keep them and wouldn’t sell them at such a discount,” Cavallo, 65, said in an interview at a Yale University conference in New Haven, Connecticut, this weekend. Today’s prices are “misguided,” he said.
Cavallo, who’s now the chief executive officer of DFC Associates LLC, a consulting firm in Buenos Aires, tamed Argentina’s hyperinflation in the early 1990s by pegging the peso to the dollar, limiting money supply growth and selling state companies. Then-President Fernando de la Rua brought Cavallo back as economy minister in March 2001 in a failed bid to maintain the currency system and avert default as the country’s recession deepened.
Greece received euro-area member states’ approval on March 14 for a second bailout of 130 billion euros ($172 billion) after the country agreed to carry out the debt exchange and implement spending cuts. The restructuring is designed to lower Greece’s debt to the equivalent of 120.5 percent of gross domestic product by 2020 from about 160 percent of GDP.
For Europe, the cost of having Greece exit the 17-nation euro region “is much higher” than keeping it in and “implementing necessary reforms gradually,” Cavallo said. “Greece owes Europe a lot of money. If Greece still has large fiscal deficits for a while, Europe will help.”
Pacific Investment Management Co., which manages the world’s biggest bond fund, sees a “significant risk” Greece will leave the euro, Andrew Balls, London-based head of European portfolio management, wrote on the company’s website on March 19. [Bloomberg]