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.