< Back to News

Norway Buys Greek Debt as Sovereign Wealth Fund Sees No Default

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,” said Andrew 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.


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.