How To Profit From A Greek Default

by: Simon Monger

No matter how much money is thrown at it, Greece can’t seem to solve its problems. The European Commission recently predicted that its deficit would reach 9.7% of GDP compared to the country’s own 7.6% projection this year. These revelations led its credit default swaps to hit yet another record high of nearly 4,000 basis points during the overnight session. So, how can investors profit from this situation?

Short the Euro, but It’s a Little Risky

The natural response to problems in the eurozone is to short-sell the euro. This is traditionally accomplished by borrowing a set number of euros, selling them for U.S. dollars or another currency, and then repurchasing the euros to repay the loan at some point in the future. Hopefully, the price will have decreased and the investor can profit from the spread.

There are two key problems with this strategy today:

  1. The Swiss franc used to be the gold standard to play against the euro, but the government recently decided to impose a ceiling on its valuation. That leaves the Japanese yen as a safe-haven currency, which also has a history of interventions and its own debt problems.
  2. The European Central Bank (ECB) is more likely than ever to print currency to prevent a default and preserve the fiscal union and intervene. After Jurgen Stark resigned from his position, the bank now has very few hawks that oppose very liberal monetary policy.

The easiest way to short-sell the euro is to buy the ProShares UltraShort Euro ETF (NYSEARCA:EUO). Since last Thursday, this ETF is already trading up nearly 7% and that could go a lot higher if problems continue. Another popular ETN is the Market Vectors Double Short Euro ETN (NYSEARCA:DRR), which is also trading up around 6.7% over the time period.

Investors can also short-sell the following long euro ETFs:

  • CurrencyShares Euro Trust (NYSEARCA:FXE)
  • WisdomTree Dreyfus Euro (NYSEARCA:EU)
  • Ultra Euro ProShares (NYSEARCA:ULE)
  • Market Vectors Double Long Euro ETN (NYSEARCA:URR)

Bet on the Decline of European Banks

With their exposure to Greek debt, European banks are also facing significant risks. In fact, French banks like BNP Paribas SA (OTC:BNOBF), Societe Generale SA (OTCPK:SCGLF) and Credit Agricole SA (OTCPK:CRARF) have fallen more than 40% on such concerns over the past quarter. These French banks and others are said to have some $56.7 billion in exposure to private and public debt related to Greece.

Investors looking for broad exposure to these banks may want to consider these ETFs:

  • iShares S&P Global Financials (NYSEARCA:IXG)
  • iShares MSCI United Kingdom (NYSEARCA:EWU)
  • SPDR S&P International Finance (NYSEARCA:IPF)
  • iShares S&P Financials Index (NASDAQ:EUFN)
  • iShares MSCI ACWI ex-US Financials Index (NASDAQ:AXFN)

Of course, some investors argue that the downside may already be priced in to some of these banking sectors. As a result, more cautious investors could also consider writing put options against their long-term bearish positions to help offset the costs.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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