Greece Fire will burn the Euro

on Thursday, 16 June 2011. Posted in , ,
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How to profit from a Greek default

Greece_FiresThat Greece will default on its debt looks close to assured very soon barring an unlikely further bailout. Greece Bond Yields are higher than your credit card and rising, already above 17%. Debt is already more than 140% of GDP and half the current budget was taken up of interest payments. Default isn’t looking just likely, but necessary. For Greece, it’s probably a good idea, but not so much for the European financial system. There are countless articles on this topic in the press today, so if you accept that a default will happen soon, how does an average investor make money from this or even just increasing fears of default? (Image from Icon/Reuters)

Here are some options. 

Short Greek Government Bonds

If you are a bond trader you can short Greek government bonds or look at investing in credit default swaps, but such a trading strategy is available only to the experts. For the average investor, we wouldn’t even try.

Short the Euro

Short selling the Euro, isn’t just about holding other currencies like the USD or Swiss Franc, although that isn’t a bad start. The Euro does look good for a crisis driven fall. The Euro last year fell to 1.19 during the first Greece scare and has risen recently to 1.46 to a USD but is back to 1.41 on concerns again about Greece and the other problem countries.  The Euro looks a good bet for further falls, perhaps to 1.30 to a USD whilst the politicians dither and Athens burns.  See a screen grab from Google Finance on the Euro/USD relationship.

USD_to_Euro

 

An excellent ETN (Exchange Traded Note) with good liquidity is DRR – Market Vectors Double Short Euro Exchange Traded Notes which is traded on the New York Stock Exchange and should be available most average punters with an e-trade or Interactive Brokers account. On June 15 alone it bounced up 3.90% and is the best choice

Short European Financials

Once the bail-out war chest or political will runs dry, which seems soon, and a default occurs, who is going to be the loser from a bond write-down? Probably the European banks and financial system, that’s who is our guess. It is difficult to get clear numbers on the holders of Greek debt, but it is likely to be banks to use as core holdings and possibly European pension funds and of course the European Central Bank (ECB). You would hope that other banks have had the good sense to run away long ago, but even then they might have lent to a bank which itself has significant holdings in Greek debt. It’s not really possible to short Greek pension funds or the ECB, and shorting European financials with a specific ETF or ETN doesn’t yet seem possible.

To short Financial stocks in general with ETFs like SEF, or SKF which would include American and other banks, seems a little too indirect to be interesting to us. Perhaps you believe that the foreclosure process in the US will continue and bank stocks in the US will continue to be hurt (not a silly idea), but that is a different bet and should be recognized as such. Also recognize that US banks have had a terrible year so far, and on most measures seem very cheap, so much bad news is already priced in.

Bottom-Line

The best choice for our money is DRR double short Euro, but also keep in mind that we haven’t allowed for your risk level (DRR is at least medium, perhaps medium-high) and we know nothing about your individual situation, so talk to your financial adviser before acting. If you don’t have a financial adviser, contact us on admin@caterergoodman.com to organize a time so we meet and develop a full analysis of your situation before you invest.

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