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NY Times, Feb. 20 2015
Greek Debt Is Vastly Overstated, an Investor Tells the World
By LANDON THOMAS Jr.
High in a Morgan Stanley office tower, Paul B. Kazarian, one of the
largest holders of Greek government bonds, was recently trying to
persuade a room full of investors that Greece’s debt load of 318 billion
euros 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 panelist, 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,” Mr. Moghadam said, as he broke
into Mr. Kazarian’s monologue. “And really, we should let some other
people ask questions, too.”
As the new Greek government and Europe engage in tense talks about how
to pare Greece’s debt burden, which at 175 percent of total economic
output trails only Japan’s, Mr. 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. On Friday, European finance
ministers agreed to extend Greece's bailout for four months.
As Greece and the rest of Europe have often appeared entrenched in their
positions, Mr. Kazarian’s analysis is a distinctive, if not quixotic
attempt — it has so far fallen on deaf ears among European policy makers
and economists — to break the logjam of thinking as to what Europe
should do about Greece’s debt.
Although Mr. 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 percent 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 last two years, Mr. 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 policy makers in
Berlin, officials at the European Central Bank in Frankfurt and
economists at the International Monetary Fund in Washington.
This week, 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.
Wiry and intense, Mr. 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, R.I., where he grew up. (Mr. Kazarian works out of
Providence, R.I.)
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 Mr. 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, Mr. 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.
Mr. 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 says 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,” Mr. 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.”
Mr. 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
recognized at its face value of 318 billion euros.
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 euros.
“How do you change the terms of a debt contract and ignore the impact on
the debt?” Mr. 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 some. 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 brushoff from Mr. Moghadam at the conference in New York, Mr.
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, Mr. 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 Mr. Kazarian’s case, he happens to be
Armenian as well.
“This is what we do — we educate,” said Mr. Kazarian, who says that his
bet on Greek bonds has been his most profitable investment ever.
But it remains to be seen if 1980s-style takeover tactics have a place
in today’s sovereign debt crisis. For example, Mr. Kazarian’s skills
were honed on corporate, not government, balance sheets. 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 Mr. Kazarian has been accumulating over the Last 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,” Mr.
Kazarian said. Greece’s creditors, he says, should just take the loss
and move on.
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