Bad research example: FT’s John Dizard and the Greek GDP linker

I was quite surprised that my old Greek GDP warrant post got hit a lot in the last few days.

By coincidence I just saw that on Monday, a guy called John Dizard recommended the GDP linker as a “great bet on Greek long-term growth”.

You have to register in order to read the article online, but although its almost a half page in the print FFm supplement, the essence is the following:

– the Argentinian linkers were a great deal
– the Greek linkers are cheap (30 cents)

In my opinion, he makes some plain wrong statements like:

“The Greek GDP warrants could begin to pay out in 2015, based on the country having experienced a minimal recovery by then”

.

As I have mentioned in the post, Greece needs to hit the 2011 nominal GDP (in EUR) by 2014, to get any payout in 2015. In 2012, I think Greece is running at around -7%. So Greek needs nominal increases in GDP by at least north of 3.5% both in 2013 and 2014 to hit this trigger. I am not sure if this could be called a “minimal” recovery.

I am not sure what happens if Greece leaves the EUR, but I would assume that the Linkers would only pay if EUR GDP is triggered, not “new Drachma” GDP.

He then goes on and says the following:

“Right now they trade at about 32 or 33 cents, which means that is what you pay for the possibility of receiving one euro in 2015”.

Again, no points. The 33 cents represent the chance that you get any cash flow over the next 30 years. I am pretty sure that Mr. Dizard never really to bothered reading the prospectus, he will be busy writing his next “analysis”.

Finally he quotes a trader who says “the discount rate on future payments is just to high”. This is of course bullshit as well. Normal “non optional” Greek Government bonds trade at 20% yield p.a. If one discounts the cashlofs without taking the options into account, one ends up with a “bond equivalent” value of 3.28%. So you are paying at 33 cent an option premium” of 10% for the bond equivalent market value which is not cheap in my opinion.

Summary: So maybe it turns out that the Greek linker is a good investment. But if it does, it is certainly not for the reasons this genius has identified. My advice would be for people who want to speculate on Greece’s future to buy the GGBs instead. At 15% of nominal, they have enough “optionality” and upside in the good case. Or you buy shares like OPAP if you want to mitigate the Sovereign default risk. Optionality wherever you look.

Edit: At least the article moved the price up by 10-15% for the linker. This is the advantage of writing for the FT.

5 comments

  • #1
    I see this is this strange worldbank index which I thought was wrong.

    I used a ARS GDP curve and just translated it into USD.

    Still, your source says that it took Argentina 7 years to reach the pre crisis GDP and this includes the Commodity and Agricultural boom where Argentina was a prime benificiary. So let’s hope, Greece finds some massive Oil and Gas resources because farming like in Argentina might be difficult.

    mmi

  • This also is an example of a rather fruitless discussion. Dizard fails to bring across the valid points of the Exotix study. So that was an easy pick for you…

    My remarks:

    1) Some recession was anticipated in the modelling of the GDP thresholds. With the numbers I see [GDP 2011: 215,088 bn EUR and -6.9% yoy expected in 2012] Greece would need a little less growth (2.5%) for the years 2013 and 2014. I would call this modest, not minimal. But also, I would not expect a payment for the GDP-Linker in 2015.

    2) Yes, the nominal threshold is defined in EUR. A Grexit would likely destroy hopes for a payment for some years. The mentioned study by Exotix though argues with a historical study that GDP grows stronger in the medium term after a revaluation – even in $-terms (!). As no quick payment is to be expected anyway, a Grexit would therefore be positive for the warrants. But also without a Grexit history suggests a very good chance of surpassing the assumed trend in growth for a number of years. Once the dark clouds dissapear there is ample room for growth after deep recessions.

    3) I find the arguments for a smaller rate of discount for payments of the warrant (brought forward by Exotix, btw.) rather convincing: As there is only a small payment (600mn EUR, if any) on the warrant and no burden on the debt/gdp-ration from the warrant, Greece has almost no incentive to default on these instruments. [I might add that these instruments originate from a further cut in interest rates on the newbonds within the PSI-negotiations, giving them the strongest moral standing within Greece’s liability structure. But it remains to be seen if that would be a valid thought. Anyway, for me both the newbonds and the GDP-Linker are a buy].

    • Dante,

      thanks for the comments.

      Re 1): The “consensus” expects a further -0.9% in Greek GDP in 2013, so 2014 would require a rather large GDP growth rate to hit the Nominal trigger. Where should that come from ?

      2) I have just checked with Argentina. In USD terms, current (2012) GDP is only 1/3 of pre crisis GDP (2001)in USD terms. That the Argentinian linkers got into the money was only possible because the trigger was in Argentinian pesos. So I would call your view that Greece can reach the EUR trigger in New Drachma as ” quite optimistic”.

      3) I have to check, but in my opinion the linkers would not survive in a default scenario, unless Greek polititians would be invested in them.

      There is no doubt that the price of this GDP linker could in theory go up a lot if some positive news emerge, but I don’t see a scenario where one would get a single cent out of this.

      • 1) I also don’t expect a payment in 2015 as growth will not be large enough.

        2) Exotix chart sees Argentina GDP at >150% of 2001 level in 2012 in $-terms. This http://www.tradingeconomics.com/argentina/gdp agrees.
        After a sharp fall due to devaluation there is a massive catch up. [If you get your hands on the Exotix study have a look at chart 2 and 3 where they study the gdp of 8 nations in $-terms after a recession and a sharp devaluation in the last 2 decades.]

        3) Ha, I would love to invest alongside greek politicians. 🙂 Seriously, the greek gdp-linker has a long time to surprise. Not paying a single time would presuppose a failed state for the next 30yrs to come. But hey, time will tell. [And of course this should be a very small and long term position at most].

  • you are very right in your assessment of the greek warrants future value. mr. dizzard of the FT is a very bright analyst, but he misses a serious drawback of the greek economy. greece is not competitive and the greek economy has been inflated over many years through borrowed money. the “natural” level of the greek gdp per capita is probably 30% and more below the current depressed levels!
    the greek economy will have to drop to that level through internal devaluation and / or return to drachma for the economy to be able to stand on its own feet.

    so the 2011 gdp level will take a decade or longer to be reached again.

    my view is that the value of the greek warrants is an exact zero.

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