Could Greece Find A Safe Haven In U.S. Markets?
It's no secret that Greece's public finances are in trouble. The nation missed a €1.5 billion payment to the IMF early Wednesday morning, becoming the first developed country to default on the supranational creditor. Its ailing government will owe another €3.5 billion to the ECB later this month. On Monday, the country's banks closed and capital controls were initiated.
Meanwhile, the United States is sitting comfortably, at least by comparison. Unemployment is at its lowest level since 2008; the S&P 500 has hit multiple all-time highs this year; and the economy is finally healthy enough for the Federal Reserve to debate raising interest rates above zero for the first time in more than half a decade.
It sounds like Greece could use a slice of the American pie.
A Solid Precedent
But is there a precedent of sovereign governments hedging themselves in foreign markets? Bob Murphy, associate professor at Boston College and former senior economist on Bill Clinton's Council of Economic Advisors, told Benzinga that indeed there is. "My understanding is that countries do this all the time. The so-called ‘Sovereign Wealth Funds' that many of the oil producers have established are vehicles for diversifying and hedging their asset holdings."
Sovereign Wealth Funds are basically investment funds established by sovereign governments. Sometimes they are established directly through public agencies, but often they're set up as government-owned companies. Such funds control over $7 trillion in assets globally.
Although Greece doesn't currently have a Sovereign Wealth Fund, there is certainly a precedent of countries investing in foreign markets. In fact, France, Italy, and Ireland -- three other Eurozone members -- have funds of their own.
Michael Maduell, President of the Sovereign Wealth Fund Institute, confirmed to Benzinga that the Eurozone does not have regulations that prohibit establishment of investment funds. But he also noted that Euro members tend to lean toward what are called Strategic Development Sovereign Wealth Funds, which actually focus on domestic investment in an effort to stimulate local markets. A Greek fund focusing on U.S. and other foreign assets, therefore, would be a break from tradition.
A Potential Avenue
A program from the CME, the largest U.S. options and futures exchange, could offer the Mediterranean country an opportunity. Under the Central Bank Incentive Program, participants can receive discounted fees for their proprietary trading of CME Group products. Any non-U.S. central bank with a registered portfolio manager is eligible to apply.
Under the program, Qualified participants can invest in anything from corn options to natural gas futures.
Michael Shore, CME's Executive Director of Corporate Communications, told Benzinga that central banks are "a growing sector in the financial markets," with many already "[holding] significant foreign reserves in U.S. Treasury securities." He also said that "compared to other alternatives like the OTC markets, CME Group listed products typically offer significant value."
According to Maduell, Sovereign Wealth Funds are often managed by central banks. The Bank of Greece (the country's central bank) currently holds over €5 billion in reserve assets, including almost €4 billion in gold. Although it's cash-strapped it could at least transfer some of its wealth to more liquid CME products offering superior price discovery.
Plenty of Skeptics
But not surprisingly, many people are doubtful that Greek investment in CME products is a wise or even feasible option.
According to the Reverend Emmanuel Lemelson, CIO of Lemelson Capital Management, options are typically a risky endeavor and probably particularly unwise for Greece, which teeters on the brink of financial collapse. "It's not feasible, it's foolish. Options are inherently speculative, [and] the vast majority expire with zero value. It is a good business for brokers, but not usually a good business for investors."
Editor of The National Investor Chris Temple, meanwhile, doesn't think that Greece is in a financial position to take on significant amount of foreign assets. "By all reports," he told Benzinga, "the country has nothing to work with."
Still, the fact remains that Greece's economy is crumbling and U.S. assets represent much more promising short-term growth opportunities than domestic alternatives.
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