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I find this interesting. It accepts the trade risk but does not seem
to account suffiently for the political risk. Is an infinity trade
safer somehow from risk? - Michael


Norway Buys Greek Debt as Wealth Fund Sees No Default (Update1)
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By Josiane Kremer


Sept. 9 (Bloomberg) -- Norway, which has amassed the world’s second-
biggest sovereign wealth fund, says Greece won’t default on its debts.

The Nordic nation’s $450 billion Government Pension Fund Global has
stocked up on Greek debt, as well as bonds of Spain, Italy and
Portugal. Finance Minister Sigbjoern Johnsen says he backs the
strategy, which contributed to a 3.4 percent loss on European fixed
income in the second quarter, compared with gains on bonds in Asia and
the Americas.

“The point is, do you expect these guys to default?” said Harvinder
Sian, senior fixed-income strategist at Royal Bank of Scotland Group
Plc, in an interview. “Norway has taken the view that they will not.
The Greek holdings are particularly interesting because the consensus
in the market is that they will at some point restructure or default.”

Norway says its long-term perspective will protect it from losses.
“One could say we are investing for infinity,” Johnsen said in an Aug.
27 interview. “It is important when you look at the time scope of the
fund and the investments that there should be a portion of active
management.”

The fund, which manages Norway’s oil and gas wealth, mostly buys
securities in proportion to their importance in global indexes. By
using its leeway to stray from those benchmarks using so-called active
management, the fund has beaten those measures by an annual average of
0.3 percent since 1998.

Yield Compensation

Yngve Slyngstad, who oversaw a record 633 billion-krone ($103 billion)
loss in 2008 when he became chief executive officer, revealed the
Greek bond holdings in an Aug. 13 interview. “Even though the
situation is difficult and will continue to be difficult, you get
compensated with regard to the yields you are getting,” he said.Yields
on Greek 10-year debt are more than 9.5 percentage points higher than
on German bonds, up from a premium of 1.15 points a year ago.

Petros Christodoulou, the head of Greece’s debt management agency,
said current prices for the country’s bonds offer a “good opportunity”
to “pick up good yields, good paper,” in an interview today with
Andrea Catherwood on Bloomberg Television’s The Pulse.

Greece’s Finance Minister George Papaconstantinou said his country’s
bonds are no longer “something to fear,” in an interview in Athens
yesterday.

“We feel confident that given where we are at the moment, there won’t
be any problem in hitting the target” for cutting the deficit,
Papaconstantinou said.

Pimco’s View

Norway’s bet on Greece is too risky for many, including Pacific
Investment Management Co., which runs the world’s biggest fixed-income
fund. “I see it as being quite a substantial risk that Greece
eventually defaults or restructures,” saidAndrew Bosomworth, Pimco’s
Munich-based head of portfolio management.

Pimco is also wary of debt issued by other peripheral EU states. “You
have the contagion risk, and until we know precisely how this
contagion risk will be contained, it is a pretty risky strategy
staying in the other countries as well,” Bosomworth said.

The 750 billion-euro ($962 billion) package crafted by the European
Union and the IMF as speculation a euro member might default
undermined the common currency “has proved successful,” Johnsen said.
The IMF said in a Sept. 1 report that “current market indicators of
default risk seem to reflect some market overreaction.”

Default Risk?

The yield premiums investors demand to hold Greek, Spanish and Irish
debt rather than German bunds are even wider than before the EU
announced its rescue package on May 10. Spain’s 4 percent yield is
about 1.8 points more than bunds, compared with less than a point
prior to the bailout. Ireland pays a record 3.8 points more than
Germany for 10-year money, more than double the previous spread.

“If I were taking a view of the three- to four-year horizon, I would
say there is value out there,” according to Sian at RBS. “But over the
near term, which is anything up to the end of the year, the pressure
is toward wider spreads.”

Prices in the credit-default swap market suggest investors are still
wary of not getting repaid by Europe’s most indebted nations. It costs
almost three times as much to insure against a Greek default as it
does to protect bond issued by Iceland, which is reliant on an IMF
loan after its 2008 banking collapse wiped out the currency and
brought the economy to its knees.

Fiscal Profligacy

The euro slumped 21 percent from a November 2009 peak through a June
trough this year as investors saw evidence of Greece’s fiscal
profligacy in other parts of the bloc. The country ran up a budget
deficit of 13.6 percent of gross domestic product last year on debt of
115.1 percent of GDP, the European Commission estimated in May.
Greece’s debt will swell to 124.9 percent this year, the commission
said.

Since June, the euro has strengthened 7.5 percent against the dollar,
signaling investors are satisfied the EU’s measures, including stress
tests on 91 of its biggest banks and liquidity support, have been
effective in stemming the crisis.

Norway’s oil fund recouped 613 billion kroner in 2009, equivalent to a
return of 25.6 percent. After generating a profit in the first
quarter, the fund lost 5.4 percent in the three months through June,
or 155 billion kroner.

Returns

Since 1998, when Norges Bank Investment Management was formed to
manage the assets, the fund returned 4.33 percent through June, 0.27
percentage point more than the benchmark portfolio it follows. The
central bank oversees the fund’s investment decisions within
parameters set by the government. It allocates 60 percent to stocks,
35 percent to bonds and 5 percent to real estate.

Only Abu Dhabi has a larger wealth fund, according to the Sovereign
Wealth Fund Institute in California. The Abu Dhabi Investment
Authority, which says 60 percent of its fund follows an index, said in
its 2009 annual report it had an annual return of 6.5 percent over the
past 20 years.

To contact the reporter on this story: Josiane Kremer in Oslo atJkremer4@bloomberg.net