Greece ETF Sinks Deeper On ‘No’ To Austerity

Greece voted against austerity measures on Sunday, opting instead for a path that will most likely trigger a series of defaults and that could lead to the country’s exit from the European Union and the eurozone.

The Global X FTSE Greece 20 ETF (GREK | D-63), the only U.S.-listed ETF focused on Greek equities, was down 10 percent in early trade following the vote. The fund has lost more than half its value in the last 12 month.

Market pundits and economists are out in masse today weighing in on the issue, but by most accounts, a Greek exit would rattle markets globally, support demand for safe-haven assets such as U.S. Treasurys and German bunds, weigh on the euro, and be particularly painful for Greece—and its people—in the near term.

From Bad To Worse

“The horrid conditions in Greece will get a lot worse before they improve,” Mohamed El-Erian said in a blog for Bloomberg today. “Without huge emergency assistance from the European Central Bank—a decision that faces long odds—the government will find it hard to get money to the country's automated teller machines, let alone re-open the banks.”

“The economy will take another worrisome step down, worsening unemployment and poverty,” the chief economic advisor at Allianz and former PIMCO chief said. “It is quite doubtful that Greece will be able to restore its status as a full member of the eurozone. Indeed, without very skillful crisis management, it is at high risk of becoming a failed state.”

Going into the referendum Sunday, investors had already poured more than $284 million in net assets into GREK fund year-to-date. The creations came even as the fund slipped. In the past 12 months, GREK has dropped more than 53 percent, and that’s before today’s massive decline. 

Chart courtesy of StockCharts.com

European politicians will now have to work on a response, and try to limit “adverse spillovers,” as El-Erian put it. As the ECB scrambles, the euro is likely to weaken.

3 Possible Outcomes

Longer term, Guggenheim’s Global CIO Scott Minerd argues there are three possible outcomes from Greece’s latest move:

1. Greece restructures its debt, and remains in the European Union and the eurozone while behind on payments to the IMF and to the ECB. Even so, Greek banks will run out of euros this week and the banking system faces insolvency.
2. Greece restructures, stays in the European Union but leaves the eurozone. A departure from the currency bloc would put in question the “the long-term viability of the euro.”
3. Greece abandons both the EU and the eurozone. While the most unlikely outcome, it could happen if Greece finds support from Russia or China.

But nuch like El-Erian, Minerd anticipates a risk-off sentiment will prevail in markets, pushing investors toward Treasurys and German bunds, all the while weighing on the euro.

“I do not believe we are on the brink of a systemic collapse as we were in 2008,” Minerd said of the impact of Greece’s decision on the global financial system. “But there remains at least one black swan event that deeply concerns me and should not be ignored. If other countries in Europe, which have engaged in austerity, should view the Greek outcome as a win, then political pressures may build and the survival of the euro may itself be drawn into question.”