Beyond Poor GREK

May 25, 2012

European officials have been kicking the can down the road for years. But it seems like that road is ending sooner rather than later. Investors beware.

The future of the euro looked less bright since May 6, when Greek political parties opposing the terms and conditions of the second bailout were voted into office.

Because, despite public support, Greek parties failed to form a government and the next elections are being held on June 17. Unsurprisingly, the Global X FTSE Greece 20 ETF (NYSEArca: GREK) has been a staple recently on our “Best/Worst Daily ETF Returns.”

GREK is, in my view, just the tip of an iceberg, and it’s really time for investors to get focused on how to control potential damage.

I realize some argue that Greece’s departure from the eurozone may strengthen the remaining nations in the European Union, and that may be true.

But it could also do the opposite. It may weaken the idea of the euro and serve as a precedent for others to exit.

After all, Greece is just one of the letters in the by-now-familiar “PIGS” acronym – the others being Portugal, Italy and Spain.

I mindfully changed the term to "PIGS" from the original “PIIGS”—the second “I” representing Ireland, which in many ways has passed through the worst of its banking crisis, as my colleague Ugo Egbunike wrote in a story last week on the fate of the euro in this whole mess.

Wanted: Eurozone Exit Plan

Officials have tried hard to fix the European debt crisis, since a failure to do so may wreak havoc on financial markets worldwide.

But another key aspect in influencing their procrastination is the fact that an “exit plan” was not built into the policy. Joining the EU was meant to be a one-way road. So now, even if European leaders decide that a “Grexit” is inevitable, there’s no policy in place for the country to do so.

It doesn’t matter anymore that the eurozone’s architects failed to meaningfully consider the possibility of today’s mess in southern Europe.

All that matters now is that today’s leaders come up with a plan. And if that plan involves Greece’s exit, then it could set a precedent for others.

Italy and Spain, both dubbed as the “next Greece,” have much larger economies than Greece, and their exit would affect the eurozone and the global economy to a much greater extent.

How long will it be until financial markets and European officials turn their attention to other nations that have high government deficits and low economic growth?

I don’t have a crystal ball, but data does show that Greece is not the only piggy playing in the mud.

From the chart below, you can see that Portugal, Italy, and Spain are much weaker than Europe and the eurozone as a whole. This shouldn’t be surprising, since both are supported by governments with much healthier balance sheets, such as Germany.


Country Indexes

Source: Bloomberg


Although Portugal, Italy and Spain aren’t in the news today, that doesn’t mean that they won’t be tomorrow.

With such a possibility in mind, there are a handful of country-specific eurozone equity ETFs that investors should be keep an eye on.


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