Hard To See How Greece ETF Can Prosper

Potential outcomes point to rough seas ahead for GREK.

The newly minted Greek prime minister gave his first speech before heading into the lion’s den of monetary policy yesterday. He, as expected, called for concessions from Greek debt holders, mostly the lightening of austerity requirements. This has many worried that Greece is headed for a default, an exit of the euro, or both.

But as Don Luskin from TrendMacro pointed out before the Greek elections that got them into this mess, half of Greece’s $320 billion in debt is held by the troika (the ECB, the EU and the IMF)—institutions capable of (although perhaps not willing) absorbing losses.

That doesn’t mean that a “Grexit” (a rather detestable portmanteau) or a simple default on that debt would be a nonevent. It just means that the immediate impact on the private markets wouldn’t be about absorbing a literal loss but about establishing a new world order.

Euro Debt Credibility At Stake

A post-Greek euro would have investors very cautious about euro-denominated debt, which could have significant implications for broader European economies.

Opinion about what “should” happen is all over the map. Here at ETF.com, Chris Brightman from Research Affiliates nearly went so far as to suggest that monetary unions like the euro are inherently a bad thing. David Kotok of Cumberland Advisors suggests that some level of hand-slapping is necessary or else the moral hazard of continued appeasement will create bigger and bigger problems.

And as the G-20 meets this week to resolve the crisis, it’s clear plenty of folks think that Greek exit is far from unthinkable. The U.K. has acknowledged it has backup plans should the euro go a country light, and none other than former Fed Chair Alan Greenspan has said that a Greek exit from the euro is nearly certain.

Hedge Out Euro Exposure

For a U.S. investor, what does this mean? Well, it continues to make a strong case for hedging out the direct euro exposure of any of your international equities, and certainly any broader collapse of European economies would likely trigger increased investment in dollar-denominated assets (like equities).

The offset, of course, is that despite a relatively strong U.S. economic picture, there’s no putting your head in the sand about the increasingly interconnected nature of economics. U.S. companies would indeed also be hurt by true Lehman-level chaos overseas.

The craziest response, to me, is to go all in on euro-denominated Greek stocks, say, with the Global X FTSE Greece 20 (GREK | C-57), which is of course exactly what some investors are doing:

Shares outstanding on GREK are up 53 percent in just the last three months, for $43 million of net inflows. On the one hand, I’m glad there’s a well-run, relatively liquid way to express opinions about global events. On the other, I have to scratch my head.

Pick Your Poison

Almost any outcome here is bad. If Greek fails to negotiate terms that release it from austerity, it is likely on a path to exiting the euro, which isn’t going to be good for Greek stocks.

If it succeeds, the moral hazard problem actually further erodes any belief I have in the ECB running a rational and tight ship, and that’s bad too. Maybe there’s a short-term recovery in GREK in that case, but it’s speculation of the highest order.

Regardless, it’s a definite “grab the popcorn” week for market watchers.

At the time this article was written, the author held no positions in the securities mentioned. You can reach Dave Nadig at [email protected], or on Twitter @DaveNadig.