Courtesy of John Nyaradi.
A Greek collapse grows more likely but ETFs can offer safe haven and profit opportunities from a Greek collapse.
Everyday the drumbeat grows louder over the potential of Greece leaving the Euro Zone and Eurodollar and what that might mean for global financial markets.
For the past several days, global stock markets have been routed over the possibility, along with significant declines in the Eurodollar which could also be threatened by a Greek collapse.
The Euro Zone is the economic and monetary union (EMU) of 17 European Union member states that have adopted the Euro as their common currency. The possibility of a Greek exit has grown significantly in the past few days, with some experts estimating that there is now a 70% chance of Greece leaving the Eurodollar. This could lead to some significant repercussions throughout Europe, and by association, the rest of the world as well.
The main reason why Greece could potentially leave the Euro is because the country’s citizens seem unwilling to accept the austerity measures that are essentially being imposed upon it by the rest of Europe, particularly Germany and France. Greece is short of funds and has been receiving bailout money from the European Union (EU) and the International Monetary Fund (IMF) for some time. However, for Greece to continue receiving bailout money, Greece has had to agree to austerity measures that increase taxes on property, lower incomes, and items such as alcohol, cigarettes, and fuel. These austerity measures also cut the wages of employees working in the public sector, reduce the benefit packages government and private workers receive, and cut back on government spending.
Most Greek citizens are not in favor of these austerity programs and have taken to the streets in open revolt and, most recently, with parliamentary elections where no political party received a majority vote. While Antonis Samaras and his center-right New Democracy party had 19.7% of the vote, many Greeks seem to be throwing more support behind the radical leftist Syriza party, which has declared that it will not approve the austerity measures that the rest of Europe has already negotiated with Greece.
Since there was no majority vote, the political parties had three days to form a new coalition government, but due to the fact that there was such divide between the parties’ ideological views, it did not come as much of a surprise that they could not agree to form a new coalition government. As a result, Greece will now hold new parliamentary elections on June 17. What is really concerning to the economic and financial institutions around the world is that Greece is running very short on cash to pay its own bills; it is projected to run out of funds as early as June. To try to hold elections when the country is very low on funds and in serious danger of defaulting could have severe economic and financial repercussions across Europe, and potentially the world.
Furthermore, early signs of a bank run in Greece are starting to emerge as people line up at ATMs and deposits start fleeing the country. Fitch Ratings downgraded Greece to CCC while the European Central Bank has stopped lending to Greece which is generating major heartburn among investors accustomed to central bank action to prop up world stock markets.
Bank runs occur when numerous bank customers attempt to withdraw their bank deposits at the same time and the banks do not have enough reserves to cover all of the withdrawals. Already, many Greeks have been pulling hundreds of millions of Euros out of Greece’s banking system to assure that they don’t lose their money. Some estimates report that the amount was $894 million USD in a single day. Greeks are fearful that Greece will not keep the Euro as its currency and switch to a national currency, which could lead to significant devaluations of their savings.
One result this sudden and massive withdrawal of deposits from Greek banks is likely to be a flow of capital into “safe havens.” The most likely safe haven currencies would include the U.S. Dollar (NYSEARCA:UUP) Pound Sterling (GBP), the Nordic currencies, and the Swiss franc (CHF).
This situation is the reason that many experts are predicting that the Euro/dollar value will continue to drop from its current 1.27. Some are even predicting that the value could fall to as low as 1.10 because many investors will want to leave the Euro and find safer currencies to invest in, such as the U.S. Dollar (NYSEARCA:UUP)
Many experts believe that Greece’s exit from the Euro would lead to a very tumultuous period in their economy for approximately two years. The result would be that their economy would fall farther and faster than it currently is at the present time. This is because the Greeks would issue their own currency, a currency that would be worth much less than the Euro, with estimates ranging from 50% to as much as 80% below the value of the Euro.
The result of the Greeks changing to their own currency would essentially lead to all banks and companies holding Greek debt denominated in Euros being forced to take losses which could result in widespread financial failures and bankruptcy. The IMF believes that Greece’s GDP would shrink by over 10% within the first year if Greece were to exit the Eurodollar.
Another serious potential repercussion is the threat of contagion spreading from Greece to Spain, Italy and Portugal.
Both Spain and Italy are dealing with their own economic problems, as Spain’s banks have not recovered from the housing crisis of 2008. Spain’s banks were not well-regulated by the government which led to widespread defaults. This includes 10 year government bond yields of approximately 6.2%, reflecting the tumultuous state of the Spanish economy and investors expecting larger returns for loaning its money to the Spanish government. The recent nationalization of Spanish bank, Bankia, is another symptom of this growing problem.
Italy’s economic situation is not much better, as its domestic economy sunk by over 6% between 2007 and 2011.
Both Spain and Italy have sizable economies, larger than Greece’s. Spain’s economy was the 12th-largest economy in the world and 5th-largest economy in Europe, while Italy’s was the 7th-largest economy in the world and 4th-largest economy in Europe in 2010. If either or both of those countries reach the point of having to leave the Euro Zone, the political, economic, and financial damage that could result from such departures could lead to total collapse of the Euro Zone and lead to the Euro no longer being the currency in any of the European Union (EU) member countries.
Safe Haven ETFs:
Tumultuous events always produce big winners and losers and a Greek financial implosion will likely yield the same outcome. Losers will likely be equity investors in Europe and the United States while winners will likely be found in “safe havens” and ETFs that would go up as global financial markets collapse.
These “safe haven” ETFs could include the U.S. Dollar (NYSEARCA:UUP) United States Treasury Bonds. (NYSEARCA:IEF)
Other ETFs that would likely increase in value would be in the inverse category and include ProShares Short MSCI EAFE (NYSEARCA:EFZ) ProShares UltraShort Euro (NYSEARCA:EUO) or ProShares Short Financial ETF (NYSEARCA:SEF) as U.S. financial stocks and ETFs are affected by the ripple effect of a Greek implosion.
Bottom Line: The chances of Greece leaving the Euro Zone increase by the day due to the fact that the Greek political factions cannot come to an agreement to form a coalition government, leading to a new set of general elections on June 17. The rising popularity of the radical left Syriza party, which has declared that it will not support Europe’s austerity demands, makes most experts think that there is now a 70% chance that Greece will leave the Euro Zone. The resultant potential for global financial chaos has been rattling global financial markets for days now and shows no signs of ending anytime soon. However, as always, ETFs can offer “safe haven” and profit opportunities even if Greece should collapse.
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