Hello Drachma, Bye-Bye Euro Zone For Greece
Combine a lack of a coalition government with the fact that Alexis Tsipras is now in charge of the country and it's easy to see why with each passing day global investors and perhaps Greeks themselves become more comfortable the notion that the "G" in PIIGS will eventually depart the Euro Zone.
Not surprisingly, the Global X FTSE Greece 20 ETF (NYSE: GREK), the lone Greece-specific ETF, has plunged 13% since Tsipras, a man viewed as brash by many and as an ultra-leftist by some, ascended to power in last weekend's Greek elections.
The decline of Greek equities has been so rapid in recent days that GREK is now trading well below the $14 area at which it debuted in December 2011 and things could worse not better in the near-term for Greece and other Euro Zone members, at least in the eyes of one market observer.
"Greece is going to be out of the Euro Zone. It's a foregone conclusion," Street One Financial President Scott Freeze said in an interview with Benzinga today. "Greece has no hope of forming a government and new elections will result in the far-left winning and refusing to meet the agreed bailout terms. Greece will have to leave the Euro, and it will take at least 8 years to get back to a stable economy with a normal unemployment rate "
Greece's economic trials and tribulations have prompted speculation among traders that the country could be demoted to emerging markets status by the companies that provide indexes to ETF sponsors, a scenario Freeze doesn't rule out.
"It's hard to say if Greece loses its developed market status," Freeze said. "Greece really won't be a developed market once it leaves the Euro Zone and odds are 60-40 in favor of index providers making the change, but that could be eight to 12 months out."
Freeze's grim view of the Euro Zone's current makeup doesn't end with Greece. As others have noted, he sees Spain, the Euro Zone's fourth-largest economy, as the next big problem after Greece.
"Spain is also a large concern - a bad bank for the government to take over to try and save our healthy banks," he said. "In a better world maybe, but it's not going to work in this environment. It's a huge economy which as a stand-alone event would be disastrous, but coupled with Greece it makes the situation dire."
The iShares MSCI Spain Index Fund (NYSE: EWP) has been where many U.S. traders have turned to establish bearish views on Spain, a fact highlighted by the ETF's significant short interest. With a double-digit dividend yield, EWP has lost almost 35% in the past year and is currently trading below where it was when it bottomed on March 6, 2009.
Spanish 10-year notes currently yield just over 6%, according to Bloomberg data while credit default swaps on PIIGS' sovereign debt has nearly tripled in the past year.
"I would expect the ratings agencies to downgrade Greece again, which isn't too big of an issue, but the carryover to Spain could force another downgrade and that could have larger systemic issues," Freeze noted.
Freeze recommends bearish positions in EWP and GREK along with the iShares MSCI Europe Financials Index Fund (Nasdaq: EUFN), which is 9.4% allocated to Spain. However, he does see some strength in Norway, which isn't a Euro Zone member.
"Norway is strong, probably one of the strongest countries in the world right now," Freeze said.
Norway ETFs have been at least less bad recently than their PIIGS counterparts and they offer investors exposure to rising oil prices due to large weights to Statoil (NYSE: STO), Norway's state-run oil giant.
The Global X Norway ETF (NYSE: NORW) and the iShares MSCI Norway Capped Investable Market Index Fund (BATS: ENOR) are the Norway-specific funds on the market today. The NORW/ENOR rivalry could prove interesting going forward, but for now the Global X offering features a slightly lower expense and has delivered better returns since ENOR debuted in January.
But beyond Norway, Freeze sees politics as problematic for not only the Euro Zone, but other industrialized nations such as the U.S. as well.
"Politicians have been a large issue with this" he said. "Nobody wants to cut entitlement programs they can't afford, including the US, because they will be run out of office. There needs to someone with a backbone to say enough is enough and we all have to take cuts. That's the only way we recover - cutting entitlements, but not strict austerity - and we need to take the political rhetoric out of the equation."
Other ETFs Freeze likes from the long side include the ProShares UltraShort MSCI Europe (NYSE: EPV), the ProShares Short MSCI EAFE (NYSE: EFZ) and the Direxion Daily Financial 3X Bear Shares (NYSE: FAZ). He also recommended shorting the Financial Select Sector SPDR (NYSE: XLF) and the Industrial Select Sector SPDR (NYSE: XLI).
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