Will it hurt us if the Greeks go broke? Depends on how much you lent them. … A while back, big U.S. pension funds owned piles of Greek bonds and debt from other nearly broke euro countries, such as Italy and Spain.
Just four years ago, the New Jersey Division of Investment, which finances checks for retired teachers and troopers and judges, still owned $2 billion worth of foreign bonds, much of it European, according to data that State Treasurer Timothy Walsh sent me. But not anymore; the state sold those securities after the 2008 credit freeze.
Pennsylvania still owns $20 million in Greek sovereign debt, says State Employees’ Retirement System spokeswoman Pamela Hile. But that’s just a dab of the fund’s $25 billion in assets. Mostly, euro debt “just hasn’t been attractive for several years, on a risk-adjusted basis.”
The larger Pennsylvania Public School Employees’ fund has also cut back on euro bonds. “Emerging” countries in Asia “have a better growth profile, which will allow them to service their debts,” spokeswoman Evelyn Tatkovski says.
But isn’t default contagious? As Americans and other savvy investors dumped European government bonds, patriotic banks in Greece, Spain and Italy bought them up — and resold them to the European Central Bank, says Oliver Boulind, whose team manages $11 billion in bonds from Scotland-based Aberdeen Asset Management’s Philadelphia office. So the central bank, and the big German and French banks that mostly support it, are on the hook. Sadly, they don’t have fat reserves, like American banks now do. So yes, this will hurt if it spreads — and America’s busy Fed isn’t likely to bail them out, especially in an election year.
So Aberdeen is light on euro-government bonds. But it still likes Europe-based companies: “Telecom Italia is a great company in a bad country,” Boulind says. “They own businesses outside Italy, like a great Brazilian cellphone operator. It’s a credit we like.” He’s also positive on U.S. municipal bonds — when carefully chosen.
Can European companies prosper even if their governments go broke? What is a European company, anymore? Or an American? Johnson & Johnson is based in New Jersey, but it has plenty of customers in Europe, and Asia, and will benefit or suffer with those economies, New Jersey’s Walsh noted.
Likewise, “we prefer to own industrial stocks with hard assets” and international customers, said Edward A. “Ned” Gray, chief investment officer at Philadelphia-based Delaware Investments’ $1 billion Global and International Value Equity portfolio. “Certain European companies,” BMW, for instance, ”are self-sufficient in terms of cash generation, they don’t need [to borrow] to keep their doors open,” making them resistant to local recession.
What next, if debtors walk away? Iceland and Argentina stiffed their creditors, and, after some pain, those nations are still in business. Greece’s popular left-wing parties want to try the same.
“Time heals a lot of wounds,” said Aberdeen’s Boulind. “Iceland defaulted three-four years ago. They were able to sell new debt a couple of weeks ago. They’re now rated investment-grade.
“If a new Greek government tries to implement some common sense solutions,” trimming freebies, actually collecting taxes, “the market tends to have a short memory,” he concluded.
Contact columnist Joseph N. DiStefano at 215-854-5194, JoeD@phillynews.com, or @PhillyJoeD on Twitter.