For a moment, let's forget the idea of restructuring, forget a "private sector" solution (like anyone wants to honestly buy this stuff except for pennies on the dollar), the latest "yes" confidence vote, which hasn't put anything into stone and just focus on the fact that Greece can't pay its debt because it has a lousy economy. Yes we said it! Yes, Greece has a lousy, horrible and somewhat unsustainable economy but it is a beautiful country to vacation in.
We hope that investors realize that no one is actually talking about how Greece plans to actually turnaround its economy in a sustainable manner. Cutting expenses is great but this only go so far in terms of helping the issue at hand. The reality is if Greece can't innovate, revitalize and most importantly, reinvent its economy, then it doesn't matter what Greece does with its debt because they will default in some form.
America has its own debt issues as well but let's clarify why U.S. debt is still being bought regularly and why it hasn't been downgraded yet. The U.S. has a multi-century track record of being economically innovative and not defaulting on its debt. Greece, on the other hand, has defaulted on its debt 5 times since 1800 and in our opinion hasn't been economically powerful on a global scale since Alexander the Great. Looks like this Greek tragedy is going to get even more exciting, so we have listed below three ways investors can trade the situation.
1. The German Play
The German people and government are heated and not going to calm down about the Greek situation. When this country ran into issues it took action immediately, implemented austerity measures and weathered the storm while simultaneously helping Greece. At this point it looks like Greece's time is up in relation to German patience.
If investors are bearish on Greece and Germany is going to be guilty by association then short iShares Germany ETF (EWG). On the opposite side of the coin if investors think Germany is going to cut itself free from the Greek fiasco and focuse solely on Germany go long iShares Germany ETF.
2. France Jumped on a Grenade
France has now become more aggressive and active on the issue of Greece given that Germany is no longer willing to take the roll of leader. As well, it wasn't like Germany passed off the ball to France but rather Germany got fed up with the situation and said "hey your turn to deal with the hot potato." Now France is throwing the hot Greek potato between its hands as it tries to figure out who is open to their ideas for a resolution.
If you think France can find a solution to Greece's economic inactivity not just a solution to its debt then go long France though iShares MSCI France Index (EWQ). By the same token investors can take the opposite side of EWQ if they think France just jumped on a grenade without sounds justification. From our perspective France jumped on a grenade, is focusing too heavily on the debt issue and not enough on the Greek economic situation. After all, if Greece's economy doesn't materially improve then it doesn't matter what anyone does to the debt.
3. The EU May Be a Ticking Time Bomb:
The noise is getting pretty loud about the collapse of the EU again and in some cases some of the media pundits make valid arguments. If Greece does default on its debt and or break away from the EU (who knows how that it would realistically look or mechanically work) then it could really cause some substantial damage for the EU. Bearish investors who think the Greek stepchild is going to light the European house on fire before leaving can short iShares S&P 500 Europe Index ETF (IEV). For bullish investors who think Greece can actually get it's act together and have people believe it in the process then they can long IEV.
4. Hit the Deck into Safety:
With Greece really turning up the fear factor there will most likely be a further flight to safety. Investors will run into Treasuries, drive up prices and push yields even lower. We're already seeing this trade occur but this could just be the beginning if Greece really falls apart beyond immediate fears.
Treasuries with longer-term maturities will see more volatility, which can be seen as a positive in terms of trading opportunity. A few names to review are Barclays 1-3 Yr. Treasury Bond Fund (SHY) and Barclays 7-10 Yr. Treasury Bond Fund (IEF). Investors can also trade Treasuries directly or use other instruments such as fixed income leveraged ETF's depending on risk tolerance.
We doubt Greece is going to get things together in time. Our perspective is that the EU will focus on putting another band-aid on the debt issue instead of dealing with Greece's weak economy. Personally we like the German economy but feel that it could get pulled down in the short term so we're looking for a better entry point and waiting to see how Greece plays out further before rushing into the situation. Last, make no mistake that this Greek tragedy won't go away fast because one way or another this issue has long-term consequences for the EU.