A contrarian view of Greek debt
Paul B. Kazarian insists that country’s debt load of ₣318b is a mirage
High in a Morgan Stanley office tower, Paul B. Kazarian, one of the largest holders of Greek government bonds, was recently trying to convince a room full of investors that Greece’s debt load of €318 billion (Dh1.33 trillion) was actually a tenth that size.
When you use international accounting standards, he declared, “it reduces the value of the debt.”
Yet with Greece’s debt woes whipsawing markets, the conference participants were having a hard time wrapping their brains around the notion. Not least one panellist, Reza Moghadam, a Morgan Stanley banker who, in his previous job at the International Monetary Fund, was the point man for the Greek bailouts.
“I don’t think it is as simple as that,” Moghadam said, as he broke into Kazarian’s monologue. “And really, we should let some other people ask questions, too.”
As the new Greek government and Europe engaged in tense talks about how to pare Greece’s debt burden, which at 175 per cent of total economic output trails only Japan’s, Kazarian’s claim that there is no debt to reduce has an absurdist feel to it.
After all, the country’s debt, and the brutal austerity measures that were imposed in return for a financial lifeline, lie at the heart of the dispute between Greece and its creditors. (European leaders agreed last week at an emergency meeting in Brussels to extend Greece’s bailout for four months after weeks of tense negotiations.)
Kazarian’s analysis is a distinctive, if not quixotic attempt — it has so far fallen on deaf ears among European policymakers and economists — to break the logjam of thinking as to what Europe should do about Greece’s debt. Although Kazarian pushes it to an extreme, his main proposition — that Greece’s debt is not as burdensome as it might appear — is not outlandish.
The country must make some very large lump-sum payments this year, but in the future, Greece will pay interest rates of 2 per cent and below on debt that matures in 30 to 40 years.
“Paul has a point, which I share to a large extent,” said Daniel Gros, an influential German economist at the Center for European Policy Studies in Brussels. “Namely, that given the low interest rates, Greek debt is sustainable.”
Over the past two years, Kazarian, 59, has been aggressively promoting his idea, convinced that if he can just bring just a few economists, journalists or analysts over to his side, many other doubters will follow.
He has met with Greek finance ministers in Athens, top policymakers in Berlin, officials at the European Central Bank in Frankfurt, Germany, and economists at the IMF in Washington. He was in Brussels, closely tracking the Greek debt talks, and he is planning another trip to Athens soon to push his ideas on the new Greek government.
He has put together a team of 100 economists, accountants, public relations experts and lawyers to help him advance his agenda, via conferences, newspaper advertisements, individual consultations and the churning out of endless briefing books and memos in multiple languages.
Slightly offbeat
Wiry and intense, Kazarian can come across as slightly offbeat. With the pink oxford shirts he wears every day, he deploys a plastic pocket protector that holds his collection of six pens and markers. His mien can veer from professorial to a bit manic, especially when he senses that someone is not quite grasping his line of reasoning.
Indeed, when he is working on a deal, there is nothing but the deal. His work days are 20 hours long (sleep comes from 2 to 4:30 in the morning), with breaks taken for morning Mass and a spin on a stationary bike (where he continues to pore over documents).
But he is no crank. In the late 1980s, he quit a banking job at Goldman Sachs to start his own investment company, Japonica Partners, named after the quiet street in Pawtucket, Rhode Island, where he grew up. (Kazarian works out of Providence, Rhode Island.)
Seeded by two investment giants of that era — Michael Steinhardt and Michael Price — he was given a mandate to hunt out companies drowning in debt, turn them around and sell them at a profit.
This is precisely what Kazarian did in 1990 with his hostile takeover of Allegheny International, the manufacturing conglomerate, which subsequently became Sunbeam. He ran Sunbeam for three years before being ousted in a management shake-up. The Allegheny buyout, which reaped about $1.6 billion in profit, came to be seen as seminal for that era and was turned into a case study at Harvard Business School.
In many ways, Kazarian is following the same playbook with Greece. He has scooped up a large chunk of the discounted bonds and is now trying to make the case, by persuading and educating, that the market is mistaken in how it is valuing his bonds.
Kazarian has spent two years and millions of dollars on his campaign, but within the small world of Greek bond investors, he remains a mystery. He said he did much of his buying in 2012, when bond prices were rock bottom, but Greek bankers and government officials say they have seen no sign of him.
“We just don’t talk about our investments,” Kazarian said, adding that he has not sold a single bond to date. “But it would not be a lie to say that we are one of the larger investors in Greek bonds.”
Kazarian’s argument stands or falls on a pretty simple accounting principle. If Greece’s debt were to be measured under the International Public Sector Accounting Standards, which most governments use, then its debt figure would need to be adjusted downward, instead of being recognised at its face value of €318 billion.
That is because there have been a series of adjustments to Greece’s debt over the years — including a restructuring, debt maturity extensions and interest rate reductions that should, if international accounting rules were applied, bring down the debt’s value. By doing that and taking into account the assets owned by Greece, the overall net debt figure falls sharply to €32 billion.
“How do you change the terms of a debt contract and ignore the impact on the debt?” Kazarian asked in an interview. “You can’t. You just can’t — the size of the debt must come down to its economic reality.”
Over time, his hard-charging style has mellowed somewhat. In the Allegheny deal, he challenged a rival executive to a fight and barged uninvited into board meetings, as described in the book The Vulture Investors by Hilary Rosenberg.
Still, his trademark persistence remains. After the brush-off from Moghadam at the conference in New York, Kazarian flew to London, where the Morgan Stanley banker is based, and was able to pin him down for a dinner.
And in Greece, where he spent six months last year, Kazarian became such a pest that Finance Ministry officials in Athens began referring to him as the Armenian visitor — an old Greek expression for someone who overstays his welcome, although in Kazarian’s case, he happens to be Armenian as well.
“This is what we do — we educate,” said Kazarian, who said that his bet on Greek bonds has been his most profitable investment ever.
But it remains to be seen if 1980sstyle takeover tactics have a place in today’s sovereign debt crisis. For example, Kazarian’s skills were honed on corporate, not government, balancesheets. Moreover, as a takeover artist, he had a fairly focused target: the board of the company in his sights.
Now, he must win over technocrats, economists and government officials across Europe, most of whom take a fairly dim view of distressed-debt investors as a general species. Success on that front would mean that all the deeply discounted Greek bonds that Kazarian has been accumulating over the past two years would soar in value, giving him a multibillion-dollar investment payoff.
Eventually, he is convinced, they will see the light and write down the value of their loans. “You are suffocating a country with a figure that has no relevance,” Kazarian said.
Greece’s creditors, he said, should just take the loss and move on.
Kazarian has spent two years and millions of dollars on his campaign, but within the small world of Greek bond investors, he remains a mystery. He said he did much of his buying in 2012, when bond prices were rock bottom, but Greek bankers and government officials say they have seen no sign of him.