Greenlight Capital CEO David Einhorn gave two ideas on Monday at the Robin Hood Investors Conference.
One was a long position — in the solar company SunEdison. And the other was a long/short — long Greek banks, short French government debt.
At about slide 38, Einhorn sorts out some of the mess that is Europe, focusing on Greece first. He argues that the worst is behind the country. The hardest decisions about austerity and the country is now “living within its means.” He recommends going long Greek banks — *Alpha and Piraeus.
France, on the other hand, is just starting to look ugly (that starts on slide 67). It’s overbudget, suffers from high unemployment, and needs reform. Once the bond market realizes all of that, Einhorn says, it’s time to short French government debt. SEE FULL PRESENTATION HERE
Greece has taken its bitter medicine, restructured its obligations and economy, and is recuperating after its near‐death experience. France appears too proud to reform.
“France is a challenging place to do business. The labour laws are stifling, the 35-hour work week includes 5 weeks of vacation, and at over $12 an hour, the minimum wage is nearly the highest in the world. It is difficult and expensive to dismiss workers … French government spending is well over half of GDP. In 2012 France elected the Socialists led by Francois Hollande who then lowered the retirement age, raised the corporate and VAT taxes, and sought to raise the tax rate on salaries over 1 million to 75% … And while Greece’s economy continues to improve, France has lagged the global recovery and may be headed back into recession. The bond market hasn’t noticed, but the rating agencies downgraded French debt. Right now France is clashing with the European Commission, where its proposed 2015 budget exceeds the 3% limit, putting France in “serious noncompliance” with the new EU rules. France is potentially undermining EU authority, setting a dangerous precedent for other EU countries, and setting the stage for a possible Euro crisis”
The debt service in France has remained stable. Ever lower interest rates have offset total debt ballooning from €1.2 trillion in 2006 to €2 trillion today. The bond market hasn’t noticed, but the rating agencies downgraded French debt.
Greece’s restructured debt has low interest rates and distant maturities. Almost half the debt pays no interest for a decade. Now, Greece has a lower interest burden than France.
Yet, while France’s troubles are still ahead, 10‐year French Government bonds yield 1.3%, while Greek 10‐year paper yields 9%. If the market re‐prices the French sovereign risk just slightly, France’s debt service will quickly get out of hand. Given this dynamic, we think shorting French government debt is a good currency and tail risk hedge for owning Greek bank stocks.
SOURCE : BusinessInsider