Bondholder Japonica welcomes Syriza, says Greece has no debt problem

BY MARIUS ZAHARIA
LONDON Thu Feb 5, 2015

Feb 5 (Reuters) – Greece’s new Syriza government spent its first week in power trying to make friends with European policymakers and wary investors. The firm that says it is one of Athens’ largest private creditors is already on board.

Japonica Partners, which raised eyebrows with a tender to buy billions of euros of Greek government bonds and by saying Athens had no debt problem, praised Greek voters for a choice that has rattled bond markets and roused formidable resistance from euro zone leaders.

While most in the market see Syriza as a threat to Greece’s future in the euro zone — and implicitly to their Greek and other European bond holdings — the Providence, Rhode Island company praised voters for showing “tremendous courage.”

Japonica says the previous government sold “fear” to its citizens by measuring what Greece owes in an inappropriate way.

“The public has been essentially lied to by the prior government about the debt,” Japonica’s finance director Christopher Magarian told Reuters by email.

“We are long-term holders and will work as hard as it takes to see justice for Greece.”

After debt yields touched some of the highest levels since Greece’s default in 2012, Japonica says it is still comfortable with its bet against the market consensus.

It put out a tender to buy up to 2.9 billion euros ($3.3 billion) of debt in June 2013, raising its target to 4 billion euros the following month.

After checks in the Thomson Reuters eMAXX fixed-income search engine and conversations with former and current investors and brokers in Greek debt, Reuters was unable to determine the scale of Japonica’s holdings of Greek bonds.

Given the tender was held privately, there is little trace of Japonica’s involvement in the market. Some traders and investors see its public campaign as evidence it must hold some bonds.

Japonica is not registered with the U.S. Securities and Exchange Commission. It calls itself an entrepreneurial investment firm.

“COMPETITIVE ADVANTAGE”

Under accounting measures used by both the Greek government and its public creditors in the past five years of negotiating painful reforms and bailout loans of about 240 billion euros, Greece’s debt amounts to almost twice the size of the economy.

Japonica, founded by publicity-shy former Goldman Sachs banker Paul Kazarian, says they are using the wrong yardstick.

Using International Public Sector Accounting Standards (Ipsas), which take into consideration the large chunk of Greek debt that comes due only decades hence and carries a below-market interest rate, net debt is just 18 percent of gross domestic product (GDP). This, Kazarian said in a video presentation to a Greek business seminar, “is a huge competitive advantage”.

The Ipsas board, which promotes its standards for use by governments and other public bodies, says Austria, Spain and Brazil are among countries that have adopted or plan to adopt the methodology. Accountants say Britain and France use a system close to Ipsas.

Kazarian, 59, said that Greek net debt under Ipsas would be half that of euro zone paymaster Germany and a third of that of Greece’s peers in the bloc.

Jacob Soll, professor of history and accounting at the University of Southern California, supports Kazarian’s numbers, telling Reuters Greece is the victim of “an accounting scandal” and a “German scam”. He reckons gross debt is 68 percent of GDP, rather than the official 175 percent.

BACKED BY ACCOUNTANTS

Kazarian, who also runs The Charles & Agnes Kazarian Foundation charity, said he hired about 70 staff who worked for about 20 months on the Greek numbers.

He then asked leading accountants to check his findings. Ian Ball, the head of the Chartered Institute of Public Finance and Accountancy International, agrees with Kazarian’s numbers. Ruth Richardson, New Zealand’s finance minister in the early 1990s, appeared in one of Kazarian’s presentations, supporting Ipsas adoption.

But his view is widely dismissed in financial markets, with investors reluctant to bet against what the International Monetary Fund and European powers have to say.

“Accounting standard issues can be important… but what the market really cares about is what the IMF tells us,” said Salman Ahmed, global fixed income strategist at Lombard Odier.

In its 2013 tender, Japonica offered to buy bonds at 45 cents in the euro, below the then market price. No investor contacted by Reuters said it bought.

“I just didn’t like their behaviour,” said a U.S. investor, who asked not to be named. “In the auction that they were supposedly having they were bidding below the market … (and) I just didn’t see any evidence that they had capital to deploy.”

Kazarian declined to comment to Reuters.

FINANCIAL BACKING

Investors have previously questioned Japonica’s ability to raise finance and were proved wrong.

Hilary Rosenberg says in her book “The Vulture Investors”, which includes a chapter on Japonica’s reorganisation of household appliances maker Allegheny International in the 1990s, that the phrase that Japonica “wasn’t for real” became “a refrain” among Allegheny’s creditors.

But Kazarian and his partner at the time, Michael Lederman, with financial backing from two large hedge funds, bought a large chunk of Allegheny’s debts and later, against expectations, took control of the troubled firm, the book says.

Rosenberg said Kazarian was “mischievously eccentric” but friends and foes alike agreed he was “a brilliant financial analyst.” Jacob Soll of the University of Southern California said: “The guy is a visionary.”

The low IPSAS measure of Greek debt “vastly trumps political risk and the nattering nabobs of negativism,” finance director Magarian said. ($1 = 0.8770 euros) (Additional reporting by John Geddie in London and Douwe Miedema in Washington; Editing by Ruth Pitchford)

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