The Euro Currency Prepares To Say Adieus To One Country While Welcoming In Another

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Includes: EWZ, FXE, GREK
by: Outsized Analytics

Summary

The German response to Syriza's position on austerity was swift and unyielding.

Lithuania stands to benefit in many respects by joining the currency bloc, including furthering itself from Russia.

The fiscally conservative position on Greece and Lithuania's addition to the bloc is bullish for the eurocurrency.

Near-term pressure on Greek shares may only subside with a reversal in political polls leading up to its January 25th election.

As we learned on Tuesday, Greece is headed for a general election in January, and the party currently leading in the polls - Syriza - is committed to seeking changes in the austerity measures previously agreed to. Well, it didn't take long for other euro bloc countries to respond.

Yesterday, Syriza leader Alexis Tsipras said that,

in a few days the Samaras government, which pillaged the country, will belong to the past, as will the memoranda of austerity.

Today, Michael Fuchs, a senior member of German Chancellor Angela Merkel's party, responded by saying,

if Mr. Tsipras thinks he can cut back the austerity measures, then the troika will have to cut back the credits for Greece.

He further added that,

The times where we had to rescue Greece are over. There is no potential for political blackmail anymore. Greece is no longer of systemic importance for the euro.

And with that, the Eurozone sent a clear signal that it was happy to move forward with or without Greece.

The markets took the news in stride, with most major European indexes and the euro currency trading slightly down. I think this is a sign that a less appreciated view from the past is taking hold - the euro currency is better off without Greece. Indeed, back in 2011, Georg Nuesslein, parliamentary economic policy spokesman for the Christian Social Union party in Germany, said that,

Greece would be better served with the drachma and the euro better served without Greece.

He further added that,

Greece has to decide for itself - we won't kick them out. But the productivity gap is so enormous that Greece would have difficulty getting back up on its feet without devaluing its currency.

Goodbye Greece, Hello Lithuania

Just as the Greeks begin to prepare for a possible exit, the currency bloc welcomes its newest member. Lithuania announced that it will officially adopt the euro as its currency on Thursday. And for all of the skepticism that surrounds the common currency, this move seems to make a lot of sense for the country that officially declared its independence from Russia in 1991.

For one, it reduces the country's risk profile and increases transparency. In this polarizing environment, risk reduction goes a long way.

Lithuania ranks 21st in the 2014 Index of Economic Freedom, which is not bad, but leaves room for improvement. The ranking boasted of the country's privatization of all its previously state-owned banks, but also mentioned corruption as a consistent problem.

Lithuania's score of 73 in 2014 as compared to worldwide averages, and its progress from 2010 through today.

Provided by The Heritage Foundation in partnership with The Wall Street Journal.

Lithuania's obligations under the Treaty and the Stability and Growth Pact will force the country to be more transparent, which should naturally reduce corruption.

Also, its appeal as an investment opportunity will increase as risks such as exchange rate and geopolitical dissipate.

Second, the incremental investment capital it attracts will help develop its infrastructure and promote technological advancements. Capital flows and technology should culminate in better jobs and better wages for the people.

Finally, and most importantly, the ease of doing business via the common currency, plus the country's comparatively low wage base, will create new trading partners. This should ultimately lead to increased exports, GDP growth, and (the biggie) a significant reduction in its reliance on Russia.

With Russia as its largest trading partner, Lithuania has been mentioned as the country most harmed by the ruble's plunge. In this respect, joining the currency bloc should prove to be incrementally positive.

How The News Affects The Markets

Everything considered, I think this news bodes well for the CurrencyShares Euro Trust ETF (NYSEARCA:FXE), which tracks the euro currency.

For one, I believe that some of the weakness we have seen in the Euro Trust ETF stems from Greece and its possible exit; an event Eurozone officials have described as a non-issue.

And, for what it's worth, the Greek economy has shown signs of growth and the ability to continue expanding. While it may exit the bloc over disagreements regarding austerity, Syriza and its advocates indicated a sincere interest in meeting the country's debt obligations (to the best of its abilities); an interest possibly strengthened via a weaker drachma and increased competitiveness.

Also, the addition of Lithuania can only help. It is not a large economy, but it is growing and possesses attractive attributes that should draw incremental capital flows now that it is part of the currency bloc.

At the moment, I cannot speak of a publicly traded Lithuanian company with enough certainty to recommend, nor find a broad ETF-like vehicle providing exposure to the country that is not dominated by exposure to Russia. However, its inclusion into the currency bloc may spur such a vehicle in the future, attracting additional capital for the country, and increasing demand for the common currency.

I also believe this news supports my thesis that the Global X FTSE Greece 20 ETF (NYSEARCA:GREK) will struggle in the nearer term. The rhetoric between Syriza and Germany is already reaching a fever pitch and neither side offers much in the way of compromise.

This sort of uncertainty is exactly the type the market doesn't like and we could see additional selling pressure on the shares as the election approaches.

However, I do recognize the possibility that the Greece 20 ETF may trade much like the iShares MSCI Brazil Index ETF (NYSEARCA:EWZ) did as that country approached its most recent national election - wildly moving up or down based on who was leading in that particular day's polling numbers.

Should Syriza appear to lose meaningful ground in the polls, I believe the shares would reverse and trade higher.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.