Benefit from the public-debt crisis by swapping bonds, selling euros and shorting stocks
Matthew Lynn 07 February 2010
The markets are in a funk about the public-debt crisis in Greece. The country was clearly not ready for euro membership and now faces some hard choices: make savage budget cuts and plunge into a deep recession; default on its debts and lose its credit rating for a generation; plead for a bailout from its European Union partners; or quit the euro.
But, hey, there might be money to be made from this Greek tragedy. The way to do it is by swapping Hungarian bonds for Greek ones, selling the euro, ditching Spanish and Portuguese assets, and shorting the Athens stock market.
The Greek crisis is accelerating. Greek bonds plunged as the markets took a look at government plans to cut a budget deficit running at 12.7 per cent of gross domestic product. Traders decided the numbers did not add up. There has been speculation that a bailout is being organised by the European Central Bank or the EU. Greece’s troubles seeped into the currency markets, dragging down the euro. Other euro-zone bond markets, in Spain and Portugal in particular, have taken a tumble. One wild story had Greece selling bonds to China to ease the budget crisis.
The markets are demanding answers, and in the next few weeks they might get them. The trouble is, none of the options are very appealing. If the country gets serious about curbing its deficit, as the European Commission insists, most of the growth of the last decade will turn out to have been illusory. If Greece begs its euro-zone partners for a bailout, it will be humiliated. If it starts printing some “new drachma” to pay back bondholders, it will be almost impossible to borrow more. Greece will do what most of us would when faced with such a terrible range of choices: prevaricate, delay, postpone and hope something turns up. Until the crisis is resolved, though, there will be plenty of opportunities to make money.
Here are five places to start:
One, buy every Greek bond you can lay your hands on. Greek 10-year bonds yield 6.6 per cent, compared with 3.2 per cent for German debt. That is a huge difference for what is essentially the same product: a government bond denominated in euros. So long as default is avoided, and Greece stays in the euro zone, your Greek bonds will soar in price.
Two, sell Hungarian and Polish government bonds. Both countries are in respectable shape economically, even if they have been hit hard by the global recession. Both aim to join the euro zone at some stage in the coming decade, at which point interest rates would fall in line with the ECB benchmark, and bond prices would soar. But after Greece’s woes, do you think Poland and Hungary will be allowed into the euro zone anytime soon? Not likely. Short those bond markets as soon as you can.
Three, sell the euro. Every day, EU and ECB officials line up to declare that the Greeks won’t get any help. Officially, that might be true. There are plenty of ways to help out on the sly. Greece could be allowed to issue bonds jointly with other countries; the ECB could extend measures that allow it to accept Greek bonds as collateral for loans; or the EU could find a way of increasing “structural” subsidies for the Greek government.
The markets will smell a bailout, however, even if it comes packaged in some fancy label. The credibility of the euro and the ECB will be badly damaged. Investors will ditch the currency, and switch back to the dollar and the yen.
Four, sell Portuguese and Spanish bonds. Let’s suppose the worst happens: Greece defaults on its debts, offering bondholders 70 or 80 per cent of their money back. Not only will Greek bonds collapse in price, so will the debts of other vulnerable euro-zone countries. The markets will pick them off one by one, with Portugal and Spain next in line, and Ireland close behind. If you short those three, you’ll clean up.
Five, sell Greek stocks. The Athens stock benchmark, the ASE Composite Index, has fallen over 15 per cent in the past six months. That is nothing like enough because the outlook is grim for Greek stocks. Inside the euro zone, Greece faces years of recession or slow growth as public spending is slashed to curb the budget deficit. If Greece leaves the common currency, the “new drachma” will be about as solid as Tiger Woods’ marriage vows. Either way, foreign investors do not want to be holding Greek stocks.
The market should be off at least 50 per cent. It has a long way to fall before this crisis is over. Whatever happens, someone will benefit. Will it be you?
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How to make money from a Greek tragedy
Benefit from the public-debt crisis by swapping bonds, selling euros and shorting stocks
Matthew Lynn
07 February 2010
The markets are in a funk about the public-debt crisis in Greece. The country was clearly not ready for euro membership and now faces some hard choices: make savage budget cuts and plunge into a deep recession; default on its debts and lose its credit rating for a generation; plead for a bailout from its European Union partners; or quit the euro.
But, hey, there might be money to be made from this Greek tragedy. The way to do it is by swapping Hungarian bonds for Greek ones, selling the euro, ditching Spanish and Portuguese assets, and shorting the Athens stock market.
The Greek crisis is accelerating. Greek bonds plunged as the markets took a look at government plans to cut a budget deficit running at 12.7 per cent of gross domestic product. Traders decided the numbers did not add up. There has been speculation that a bailout is being organised by the European Central Bank or the EU. Greece’s troubles seeped into the currency markets, dragging down the euro. Other euro-zone bond markets, in Spain and Portugal in particular, have taken a tumble. One wild story had Greece selling bonds to China to ease the budget crisis.
The markets are demanding answers, and in the next few weeks they might get them. The trouble is, none of the options are very appealing. If the country gets serious about curbing its deficit, as the European Commission insists, most of the growth of the last decade will turn out to have been illusory. If Greece begs its euro-zone partners for a bailout, it will be humiliated. If it starts printing some “new drachma” to pay back bondholders, it will be almost impossible to borrow more. Greece will do what most of us would when faced with such a terrible range of choices: prevaricate, delay, postpone and hope something turns up. Until the crisis is resolved, though, there will be plenty of opportunities to make money.
Here are five places to start:
One, buy every Greek bond you can lay your hands on. Greek 10-year bonds yield 6.6 per cent, compared with 3.2 per cent for German debt. That is a huge difference for what is essentially the same product: a government bond denominated in euros. So long as default is avoided, and Greece stays in the euro zone, your Greek bonds will soar in price.
Two, sell Hungarian and Polish government bonds. Both countries are in respectable shape economically, even if they have been hit hard by the global recession. Both aim to join the euro zone at some stage in the coming decade, at which point interest rates would fall in line with the ECB benchmark, and bond prices would soar. But after Greece’s woes, do you think Poland and Hungary will be allowed into the euro zone anytime soon? Not likely. Short those bond markets as soon as you can.
Three, sell the euro. Every day, EU and ECB officials line up to declare that the Greeks won’t get any help. Officially, that might be true. There are plenty of ways to help out on the sly. Greece could be allowed to issue bonds jointly with other countries; the ECB could extend measures that allow it to accept Greek bonds as collateral for loans; or the EU could find a way of increasing “structural” subsidies for the Greek government.
The markets will smell a bailout, however, even if it comes packaged in some fancy label. The credibility of the euro and the ECB will be badly damaged. Investors will ditch the currency, and switch back to the dollar and the yen.
Four, sell Portuguese and Spanish bonds. Let’s suppose the worst happens: Greece defaults on its debts, offering bondholders 70 or 80 per cent of their money back. Not only will Greek bonds collapse in price, so will the debts of other vulnerable euro-zone countries. The markets will pick them off one by one, with Portugal and Spain next in line, and Ireland close behind. If you short those three, you’ll clean up.
Five, sell Greek stocks. The Athens stock benchmark, the ASE Composite Index, has fallen over 15 per cent in the past six months. That is nothing like enough because the outlook is grim for Greek stocks. Inside the euro zone, Greece faces years of recession or slow growth as public spending is slashed to curb the budget deficit. If Greece leaves the common currency, the “new drachma” will be about as solid as Tiger Woods’ marriage vows. Either way, foreign investors do not want to be holding Greek stocks.
The market should be off at least 50 per cent. It has a long way to fall before this crisis is over. Whatever happens, someone will benefit. Will it be you?
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