Russell Investments, which advises funds with $2.4 trillion in assets, will reclassify Greece to an emerging from a developed market, an unprecedented step taken after a recession reduced the nation’s economy by 20%.
Greece, which was raised to developed market status by the adviser in 2001, has failed one or both of Russell Indexes’ economic and operational risk assessments each year since 2011, according to a note on the company’s website. The relegation will force managers to buy and sell shares to align holdings with their funds’ criteria.
“Since the country began revealing unsustainable levels of public debt in 2009, it has been in an unfortunate economic tailspin that at times has threatened to pull apart the entire European Monetary Union,” according to a statement from Mat Lystra, Russell’s senior research analyst. While bailouts by Europe have eased its debt burden, “more than loan repayments will follow the diffusing of the crisis, since any opportunities in the Greek economy have become inherently riskier exposures for global investors,” Russell said.
Greece is the first country Russell has cut to emerging from developed market status, according to Michael Gelormino, a spokesman in New York.
Reclassifications are rare and require three years of “sustained changes in economic criteria,” Russell Indexes said in the statement. Bank of Greece Governor George Provopoulos said on Feb. 25 that unemployment will increase this year after averaging 24.5% in 2012. While the country’s benchmark ASE Index of equities has doubled since reaching a three-decade low in June, it remains down 81 percent since October 2007.
“Any index provider’s downgrading of a market’s categorization is a consequential decision, and Russell does not take this action lightly,” the Seattle-based company said. “Although the size of the Greek market has declined significantly in the past three years, there are still costs associated with this change for indexers of developed and emerging markets. Additionally, a negative stigma may attach to any developed market that loses its advanced designation.”
In determining whether to reclassify a market, Russell assesses how it compares with other countries in terms of per- capita income, total market capitalization, the size of its individual companies and the level of trading volume, among other things.
Coca Cola Hellenic Bottling Co. SA, the world’s second- largest Coca-Cola bottler, is in the process of moving its listing to the London Stock Exchange in an effort to boost trading volume. MSCI Inc., another index adviser, put the Greek market under review for downgrade last June and said the migration of Coca Cola HBC worsened its changes of remaining a developed market. MSCI’s decision is expected later this year.
The combined value of Greek stocks is about $48 billion, about the same as Pakistan and less than Mexico, according to data compiled by Bloomberg. The total will probably fall below Vietnam’s $41 billion in capitalization after the removal of Coca-Cola HBC, the data show.
Greece has received two bailouts from the euro area and International Monetary Fund worth 240 billion euros ($313 billion) and conducted the world’s biggest sovereign debt restructuring since it triggered the region’s debt crisis in 2009. The aid has been tied to measures to cut the country’s deficit and reform its economy.
The nation is gradually exiting from its crisis, with confidence building and deposits returning, even as it faces another difficult year in 2013, Provopoulos said Feb. 25 in a speech at the central bank’s annual shareholder meeting. The country’s economy, which entered a recession in 2008, will continue to contract this year before beginning its recovery in 2014, he said.
Russell’s country classifications are announced each year in March and any changes become effective at the conclusion of its annual index reconstitution process in late June.