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.
Greek bonds: Europe’s hidden gem?
Lloyds, RBS While banks in the EU have about 45.5 trillion euros of assets, according to the European Banking Federation, they have been slow to unload them because of accounting rules, political pressure and to avoid selling at steep discounts. Among the more aggressive sellers are London-based Lloyds and Royal Bank of Scotland Group Plc , which the U.K. government saved from collapse during the financial crisis. The two banks said they have reduced unwanted assets by more than 420 billion pounds. Spain set up a so-called bad bank last year to unload 90 billion euros of soured real estate loans from rescued lenders. By contrast, German, French and Italian lenders have been slower to shrink assets. While selling loan portfolios is one way to meet global Basel III capital standards that go into full effect in 2019, many European lenders have sought to avoid realizing losses on investments. The European Central Bank s policy of flooding the banking system with cash also has eased pressure to sell at depressed prices. Waiting Game Its a game of waiting while the banks are able to provision more and more each quarter, each year so they can sell loans at discounted levels, said Alexandra Jung, a partner and co-head of European investments at Oak Hill Advisors LP, a New York-based debt investor with more than $20 billion under management. The scale of the market is there, and weve seen banks beginning to sell. Political pressure is another obstacle. Investors scouting for bargains in France or Germany have found it easier to buy debt from banks based in other countries.