Prem Watsa: 'Greek banks are safer'

Greece has entered a virtuous cycle of growth, and the next few years will be especially beneficial to the economy and Greeks if political stability is maintained and business-friendly policies are implemented. This is the opinion of Prem Watsa, chairman and CEO of Fairfax Financial Holdings, the country's largest foreign investor. The major shareholder of Eurobank and Eurolife, who also owns significant stakes in other Greek companies and has recently increased his exposure to Greece, explains why it is currently "arguably" better to invest in Greek banks than in US banks.

Q: Are you optimistic about the course of the Greek economy?

A: We trusted Greece many years ago and have remained committed to it through all the good and bad times. You are in an extremely good position, even if you don't realize it. You have been through very difficult times, I realize that, but when we look at our businesses in Greece and some key indicators of the economy, I am very, very optimistic. Private sector debt in Greece is not high; it is at the level of 130% of GDP, while in other countries, like Sweden, it is at 300%. The level of private-sector borrowing in Greece is one of the lowest in Europe. Very few Greeks have mortgages compared to other countries. Additionally, your public debt, of which you have plenty, is long-term. The average maturity is 21 years, and the average cost of servicing it is at an incredibly low 1.5%, while the government has raised 38.5 billion in cash. This is a large amount because the annual debt service costs are a fraction of that. This means that the country is in a relatively strong financial position and has vastly improved from the extremes it had reached in the recent past.

Q: How would you characterize the growth prospects of banks in Greece?

A: The position of Greek banks is also strong. Being a 30% shareholder in Eurobank, I am well aware of that. But more broadly, the loan-to-deposit ratio is only 60%, while in Sweden it is over 150% and in Germany over 100%. So in Greece, there is significant lending room, and the demand from the private sector and the public sector for bank funding is strong. Banks can provide it, and in Greece, there are practically only four banks. Do you know how many banks there are in the United States? There are about 4,000 banks.

Q: By the way, how serious do you consider the banking crisis that has occurred in the United States? Is there a risk of it spreading to Europe and Greece?

A: It is a difficult situation, but the capital position of the Greek banks is very strong. Their capital adequacy is one and a half to two times that of the US banks. They are highly capitalized and will remain so as, among other things, dividends are not yet allowed to be distributed. It will probably, of course, be allowed in 2024. Unlike Greece, the problem for the US banks that were hit was that the rise in interest rates greatly worsened the long-term position of their assets, leading to large losses. At the same time, central bank rates and long-term interest rates are rising. In the US, they rose from 0% to about 5%. So if you hold long-term assets, you are suffering losses, and there is nothing you can do about it. This is an issue for insurance funds, insurance companies, and banks that have these portfolios. In our group, we did not want to take such risks. For years, 50%-60% of our portfolio was held in cash, with practically zero return. But we were concerned about the looming rise in interest rates and did not want to take the associated risk. We didn't chase yields. In Europe, you had zero interest rates, and now the ten-year cost for Germany is 2.5%. There was a lot of financing in the past years at a low cost. Now everybody is looking to find out who is writing losses on them. And inflation has not yet sufficiently decelerated, so the central banks cannot go into quantitative easing to strengthen the system.

Q: Are you worried that inflation in Europe will prove more persistent than the market expects?

A: It will recede. And it will recede because, for example, in the United States, banks will start to reduce risk and will certainly tighten access to financing. The money supply will decrease. It will be difficult to borrow now and low-rated businesses will be asked to pay prohibitive costs to get capital. It will be a difficult environment, but it will also drive inflation lower.

Q: So is it safer to invest in Greek banks, Eurobank for example, than in US banks?

A: Undoubtedly. Especially in relation to the smaller US banks. But also some of the larger ones. If you factor in with their core regulatory capital the as-yet unaccounted losses on their long-term positions, these would fall below 10%. At the same time in Greece, the regulatory capital is over 15%. At Eurobank, where we have, you know, an excellent executive in charge, Fokion Karavia, we had significant profitability in 2022, after of course some difficult years. We're not going to sell a single share. It's an amazing bank and we believe that the next four to five years for Greece will be very, very good and, as you understand, when the economy is doing well, the banking system is doing well.

Q: Are you worried that the specter of political instability is returning? Do you remain optimistic ahead of the elections?

A: You had 5.9% growth in Greece last year, while Germany remained stagnant. You must understand that Greece's time has come. Significant inflows of foreign direct investment have begun, but an also domestic and public investment. All the major technology groups, such as Google, Microsoft and Amazon, are investing in data centers and cloud services in the country. Greek expatriates, such as those from Canada, are returning to Greece and investing. But of course, one thing that is needed is stability. You need stability in your political system. You know I admire what this government and Prime Minister Kyriakos Mitsotakis have done. I am impressed by how much progress the country has made in these four years. So stability is necessary. And I think people in Greece see the progress and you will have stability.

Q: What are the best moments you remember from your time in Greece?

A: My first trip and the holidays here many years ago, but also the opportunity to meet such capable and pleasant people. A good moment was also the meeting with the then Prime Minister Antonis Samaras, who convinced me to invest in Greece. But then also with the next Prime Minister, Alexis Tsipras. I traveled to Greece and met him when he was elected. And I said to him, "If you don't want us here, we should leave." And he said, "no, we want you, you're the kind of investor we want". And of course, my meeting with Prime Minister Kyriakos Mitsotakis was very important afterward. What he has achieved is important. Better than our expectations. He has laid the foundations for a very good course for the country for the next five to six years, possibly even longer.

A few months after the elections, the investment grade

Q: You have been in Greece for ten years. You have had the fortitude and insight to stick to your investments under prime ministers like Antonis Samaras, Alexis Tsipras and Kyriakos Mitsotakis. If someone who wants to invest in Greece were to ask you if there is a political risk in the country, what would you say?

A: I would tell him that Greece is an excellent investment destination for all the reasons I mentioned before. However, the economy is always based on stability. If you have business-friendly policies, such as those pursued by the government of Kyriakos Mitsotakis, there is stability. I will tell you from my experience from all over the world, Canada, the United States and elsewhere: when you have a business-friendly policy environment, then investment booms for everyone. You have not had that environment in the past. You have it now. The country's prospects in this light look fantastic. If you continue on this path it will be very, very positive for Greece. I don't think you will ever go back to an environment that is not friendly to entrepreneurship.

Q: Over the last few years we have been watching how you have been diversifying your investments in Greece, beyond banks and insurance, into real estate, tourism and also into holdings such as Mytilineos. Could you explain the rationale?

A: These are moves that can be explained by what I have told you. Greece is in an extraordinary position. And with that in mind, it is natural to look for opportunities. In Grivalia Hospitality, which as you know is headed by George Chryssikos, another amazing executive, we are making investments in major international projects such as One&Only, which we expect to start operating soon, or Amanzoe. So we are continuing to invest in this direction. However, I must confess one more thing: we are also very sensitive to talent and people. When we find the right executives and people leaders, we support them and increase our investments. Alexandros Sarriyorgiou at Eurolife is a case in point. And you have such talents in Greece. They just need to be given the opportunity. And this is what the country needs to do by shaping its policies accordingly, creating an environment that is increasingly friendly to entrepreneurship. Look at Mytilineos, what a great company Evangelos Mytilineos is building. You have a lot of worthy people in Greece.

Q: And are you satisfied with the returns on your positions?

A: The Athens Stock Exchange started the year with one of the highest returns internationally. And it comes from a low level. Banks are trading at only five to six times their earnings. Given their good condition, it is reasonable to expect them to close the valuation gap against foreign banks. I expect Eurobank over the next 3-4 years to do very well, much better than anyone expects today. So we are long-term investors, and we like to approach our investments looking at long time horizons. So we remain bullish on Greece and optimistic about the companies we have.

Q: What do you think will be the next decisive step for the Greek economy and businesses?

A: The upgrade of the country's credit rating to investment grade is within reach. Who would have believed that 4-5 years ago? I believe that a few months after the elections, Greece will finally achieve investment-grade status. It's worth noting that S&P Global Ratings recently estimated that Greece has one of the most favorable debt profiles of any country, globally. However, we must remember that stability is crucial. We have invested a lot in Greece, and we believe that the future will be even better than the recent positive performance, as long as the country continues to prioritize stability and business-friendly policies. 

[This article was translated from its Greek original and was first published in Kathimerini's Sunday edition in Greece]