American Billionaire Makes Risky Bet on Greece Debt Deal

By JACK EWING
JUNE 9, 2015

The New York Times

FRANKFURT — The contrarian American billionaire Wilbur L. Ross Jr. made a bundle betting on the Irish banking system when it was down and out, and a similar wager on Cyprus now looks promising. But Greece may prove to be the toughest test yet of his knack for cashing in on eurozone crisis spots.

Mr. Ross, who built his career investing in distressed assets, is the ringleader of a group of investors who last year pumped 1.3 billion euros, or about $1.47 billion, into Eurobank Ergasias, the third-largest bank in Greece.

In the weeks to come, the fate of Mr. Ross’s money — along with the whole Greek financial system — may hinge on whether the country’s leftist government can avoid the chaos that would accompany an exit from the eurozone.

In the interim, Greek banks are in a perilous state. The uncertainty about the country’s future means that Greek banks cannot raise cash on the international monetary markets. Without cash, the banks cannot lend. The result is a vicious circle in which businesses cannot get credit, hurting employment and profits and causing tax receipts to decline just when the government in Athens desperately needs cash.

No wonder Mr. Ross is rooting for the Greek government to make peace with its creditors — the International Monetary Fund, the European Central Bank and the other eurozone countries — and unlock more aid.

A debt deal seemed as elusive as ever on Tuesday, when officials in Brussels reacted coolly to revised Greek proposals meant to end a monthslong standoff, saying the proposals backpedaled on fiscal targets recently agreed to by both sides. The Greek prime minister, Alexis Tsipras, had tentative plans to meet in Brussels on Wednesday with Chancellor Angela Merkel of Germany and President François Hollande of France in another effort to break the impasse.

Whatever hardships Mr. Tsipras’s government fears under the tough terms its creditors might be demanding, Mr. Ross says Greece could have even more of a struggle trying to go it alone with a bankrupt banking system.

“A default and a removal from the euro would provoke even worse austerity than anything being proposed by the institutions,” Mr. Ross said in an interview.

On paper, Mr. Ross and the other investors have already lost hundreds of millions of euros. Eurobank shares have fallen by more than half since April 2014, when Mr. Ross and a group he leads bought a stake of a little more than 20 percent. The shares recently traded around 13 euro cents. Before the crisis began in 2010, Eurobank shares traded as high as €60.

The other investors allied with Mr. Ross include Fairfax Financial Holdings in Toronto, whose founder and chief executive, Prem Watsa, is known as the Warren E. Buffett of Canada. The private equity firm Mr. Ross oversees, WL Ross & Company, invested €37.5 million of its own money.

He and the other investors poured their money into Greece at a time when the country was beginning to show signs of finally returning to growth after a long, deep slump and two international bailouts. But since January, when Mr. Tsipras’s government came to power, promising to relieve Greece of the austerity engendered by those bailout programs, the economy has lapsed back into recession and depositors have been pulling money from the banks.

Given Mr. Ross’s record of profiting from badly damaged assets, though, it would be wrong to discount his chances of making a killing this time.

In 2011, investors led by Ross & Company invested €1.1 billion in Bank of Ireland, a commercial bank, when the country was in the depths of a banking crisis and recession caused by a housing bubble. But Ireland, and the bank, bounced back. Mr. Ross’s firm and the other investors, including some of the same people who have invested in Eurobank, sold their shares last year for three times what they paid.

It is too soon to know whether Mr. Ross’s investment will pay off in the Bank of Cyprus, where he and co-investors own an 18 percent stake. But the economy of Cyprus is recovering from the crisis that nearly destroyed the banking system in 2013. And in April, the country’s Parliament passed a law that would streamline the country’s tortuous foreclosure process and make it easier for banks to collect from delinquent borrowers. The new law will allow banks to restructure problem loans, which amount to more than half of the total.

Greece is arguably the toughest case of all. At least on paper, the four largest commercial banks in Greece — National Bank of Greece, Piraeus Bank, Eurobank and Alpha Bank, none of whose officials were willing to comment — are solvent. They all passed tests of their financial health conducted late last year by the European Central Bank.

But they passed in part by using a legal but dubious accounting method, in which they counted anticipated tax breaks as capital. That practice, allowed in several other eurozone countries as well, is being phased out by regulators and is considered especially risky in Greece, because a bankrupt government would probably not be able to pay refunds due to taxpayers.

“This accounting option has long been viewed with a great deal of skepticism in many quarters,” Andreas Dombret, who is responsible for bank supervision at the German central bank, the Bundesbank, said in an email. “It is a particularly dicey thing to do when the sovereign is struggling financially like in Greece.”

Problems at the Greek banks began mounting in the prelude to the election of the left-wing Syriza government in January and have continued ever since. Depositors fearful that Greece would drop out of the euro shipped €30 billion abroad or squirreled it away in their homes from the end of November to the end of April. The government contributed to the deposit outflow when it raided the bank accounts of state entities to meet its basic financial obligations.

The banks have been surviving on a drip feed of emergency cash from the European Central Bank. But the central bank would be forced under its rules to cut off the funding if Greece could not reach an accord with its creditors.

If there is no agreement between Athens and the creditors, the consequences would be dire and unpredictable. People who have not already sent their money abroad or hidden it under a mattress might storm the A.T.M.s. Desperate to stop the flight of wealth abroad, the government would impose restrictions on money transfers, so-called capital controls.

In the worst case, Greece would drop out of the euro; remaining loans and deposits would be forcibly converted into newly printed drachmas which, according to some estimates, would immediately lose about half their value against the euro.

If the government defaulted on its debt, Greek banks would suffer disproportionately because they own tens of billions of euros worth of Greek bonds. The country and the banks might then go down together in a fatal embrace of mutual dependency.

In other countries that have gone bankrupt, “when banks failed, so did the economy,” said Carl B. Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y., who has advised Latin American countries with debt problems.

But Mr. Ross argues that the situation in Greece could take a swift turn for the better if the brinkmanship on display between Athens and the creditors ends in a credible deal that restores the confidence of foreign investors.

Greek banks could regain access to international money markets. Their world would start to turn again. And Mr. Ross would look very smart.

Mario Draghi, the president of the European Central Bank, has already hinted that Greece could benefit from his bank’s stimulus measures if Athens makes a deal.

Mr. Ross predicts that, too. “If there is a negotiated settlement quickly, two things will happen,” he said. “I think the E.C.B. will be very supportive and restore liquidity to the banks. Two, it wouldn’t take very long at all for the banks and private sector to regain access to the capital markets.”

Michalis Massourakis, chief economist at the Hellenic Federation of Enterprises, a Greek business trade group, said that international investors needed to be convinced that any agreement would bring lasting stability, rather than just postponing the day of reckoning.

“Greece is not a basket case,” Mr. Massourakis said. “It is only the political situation that is causing this terrible situation.”

Liz Alderman contributed reporting from Paris and Niki Kitsantonis from Athens.