Europe Stocks Post Second Weekly Drop Amid U.s. Shutdown

Greek bonds: Europe’s hidden gem?

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None of the significant players is local, said Victor Khosla, founder and chief investment officer of Strategic Value Partners LLC, a $3.4 billion Greenwich, Connecticut-based hedge-fund and private-equity firm that has made distressed investment in Europe since the crisis began. Its the American firms that have the culture and the DNA to do this. The distressed-asset sales are part of a larger effort by European banks to slim down. RBS, based in Edinburgh, said last week that a group headed by private-equity firms Corsair Capital LLC and Centerbridge Partners LP is the preferred investor ahead of a planned initial public offering of its 314 branches. RBS has to sell the branches by 2014 to comply with EU rules after receiving a 45.5 billion-pound bailout in 2008 and 2009. Blackstone Binge Alberto Gallo , an analyst at RBS, estimates that banks in the euro area need to chop 2.8 trillion euros of assets. Much of the reduction will result from running off performing loans, and some banks will continue to sell mortgage-servicing units, branch networks and other profitable operations. People were hoping it would be like the U.S. in 2008 and 2009, where banks would sell loads of stuff and clean up their balance sheets, Avenue Capitals Lasry said. Europe is doing that, but it will take 5 to 10 years. Blackstone, with $229.6 billion under management as of June 30, has been among the biggest buyers of distressed European real estate loans from banks since 2011. Late that year the New York-based firm took over 1.4 billion pounds of commercial mortgages from RBS in a transaction the bank partly financed. The deal was part of more than 100 debt-portfolio acquisitions investors including Apollo, Lone Star and Cerberus have struck since the end of 2009, according to PwCs Thompson. The American buyers arent just picking up bundled loans from banks. Blackstones $63.9 billion real estate unit has focused on buying single European properties threatened with foreclosure and on debt-laden developers. The unit, which can make investments in distressed or non-distressed assets, bought underused European warehouses this year and 1,860 apartment units in Madrid. It purchased Dublins Burlington Hotel late last year in a foreclosure sale from Lloyds at less than a quarter of its 2007 price.

By Mark Thompson @MarkThompsonCNN October 3, 2013: 8:27 AM ET Greek Prime Minister Antonis Samaras has stuck to the task of painful economic reforms. LONDON (CNNMoney) Investors are scouring Europe for ways to make money from its tentative recovery, and one U.S. firm thinks it has found the answer — buy Greek government bonds. Japonica Partners said it believed Greek debt was “massively undervalued” and should be rated several notches above the junk status assigned by the big credit rating agencies. Greece has been shut out of international bond markets since 2010, when its government borrowing spiraled out of control. It has been rescued twice by the European Union and International Monetary Fund and was forced to restructure its debt in March 2012, imposing losses of more than 100 billion euros on private bondholders. Related: Europe’s recovery is weak, warns ECB But hedge funds — such as Dan Loeb’s Third Point — and other niche investors who bought into Greek debt since the restructuring have made a killing. Yields on Greek 10-year debt in the secondary market have plunged from around 44% in March 2012 to 9%. Japonica’s statement was greeted with derision by some investors Thursday, but the firm that made its name restructuring bankrupt Allegheny International in the early 1990s believes it has spotted an opportunity others may have missed. It claims to have become one of the larger, if not the largest, holder of Greek government bonds, and has hired a former senior executive from Norway’s oil fund — one of the world’s biggest investors — to help manage the portfolio. Related: Investors embrace European stocks “Greece is one of history’s most extraordinary sovereign rejuvenations hidden in plain sight by pervasive systemic misperceptions,” Japonica said, adding it expected yields should break below 5% in 2014. It’s a bold prediction but Japonica may have a point. Greece’s headline economic data and social crisis remain as depressing as ever, and it may yet need another 10 billion euros in support. Still, the government is on track to deliver a primary budget surplus — stripping out the cost of servicing its massive debt this year — and hopes to return to the bond market in the first half of 2014.

We came out of the summer months too optimistic about Europe, so some pause for breath was needed. We saw the profit warning from Nokian Renkaat and the numbers from Unilever. I think well continue to get more profit warnings going into the earnings season. The U.S. government began a partial shutdown on Oct. 1 after Democrats and Republicans failed to agree on a budget, closing some services and placing as many as 800,000 federal employees on unpaid leave. A two-week halt could shave 0.25 percentage point off fourth-quarter economic growth, Federal Reserve Bank of San Francisco President John Williams forecast. Debt Limit In addition to passing a budget, Congress must authorize an increase to the $16.7 trillion debt ceiling this month to avoid a default. The Treasury has said it will exhaust measures to stay within the limit by Oct. 17 and warned that a default could have catastrophic consequences that might last for decades. The government will run out of cash to pay bills between Oct. 22 and Oct. 31, according to the Congressional Budget Office. House Republicans met in Washington yesterday to discuss their negotiating tactics, with Speaker John Boehner telling party members that he will not allow a U.S. default, according to a person in the room speaking on condition of anonymity.