This summer, as Greece went to the polls, most pundits (including many of us here at MoneyWeek) thought that a Greek exit was only weeks away.
Citi put the chances at 90%. Even Germany started talking about how to manage an exit. At one point Greek debt was trading at less than one-fifth of its face value.
Yet in the end, Greece voted to stay in the euro. Then, European Central Bank boss Mario Draghi’s vow to do “whatever it takes” to save the euro, helped reduce pressure on the country.
The good news for Athens didn’t stop there. Its latest batch of bail-out cash has been released, even though the government has missed its targets. To cap it all, just as France was losing its AAA-credit rating, ratings agency S&P upgraded Greek debt by a massive six notches from “selective default” to B-.
So is a Greek exit off the cards? We don’t know. But what we can say is, it doesn’t matter. Greece is going to get a weaker currency one way or another – and that could be very good news for Greek stocks...
Greece has been saved – but only for now
Proving yet again that you should buy when there’s blood on the streets, those who bought Greek government bonds when all the talk was of a ‘Grexit’ have been well rewarded. As the FT reports, hedge fund Third Point has made profits of $500m from buying the bonds this summer.
However, we hope they remember to take some profits off the table. It’s certainly clear that after the events of the summer, the odds of a big eurozone split involving Italy and Spain is much lower. But we still wouldn’t entirely rule out an exit for Greece.
The bail-outs and buybacks have certainly bought Athens more time. What they haven’t done is changed the fundamentals of the Greek economy. Firms are still laying people off and capital is flowing out of the country.
Even the Troika (the big bail-out committee) expects GDP to fall another 4% next year. And if Greece stays in the euro a 5-6% fall is more likely, reckons Ben May of Capital Economics. Meanwhile, German forecasting firm IfW Kiel believes that unemployment will surge from its current level of 24% to a peak of 32% by 2014.
This will have two main impacts. Firstly, as more people lose their jobs, political opposition to austerity will continue to grow. The anti-austerity party, Syriza, now has a clear lead in the opinion polls, with the far-right Golden Dawn the third-largest party. Secondly, a bigger slump in the economy also means less tax revenue, which means that more cuts will be needed, which will hit growth further. It’s a vicious circle.
That said, this doesn’t mean Greece will actually leave. Protests can be ignored (they have been so far). More importantly, an election doesn’t have to be held until 2016. Even now, most Greeks still want to stay in the euro. They might blame austerity for their woes, but they don’t make the connection that austerity is a direct result of them having to use the same currency as Germany.
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Europe will be forced to do quantitative easing
It seems as though many in the Greek government hope that a combination of debt write-offs and relaxed terms can see them through until growth returns in 2014.
However, Brussels may have to take more radical action. S&P has praised “the strong determination of eurozone member states to preserve Greek membership”. That’s the main reason it upgraded Greek debt.
Yet the gap between northern Europe and the rest of the currency bloc is still as wide as ever. Polls in July and September have suggested that up two two-thirds of Germans want to quit the euro. Even more want Greece to leave.
So with elections coming up in the autumn, Angela Merkel is likely to resist more direct support for Athens. This makes the indirect solution of money printing – US or UK-style – much more attractive.
The threat of the entire eurozone shrinking next year will also increase the pressure on the ECB to step up its action. The ECB’s own indicator suggests that economic sentiment is very low. Draghi himself recently stated earlier this month that there are “downside risks to the economic outlook”.
And while Merkel would never publicly say so, even Berlin may welcome a looser monetary policy. While the German IfO Business Climate survey showed some small gains, it still is close to the lowest level for nearly three years, and consistent with stagnation.
Why a weaker euro will be good for Greece
So whatever happens, the status quo is unlikely to continue. Instead, there are two scenarios: a Greek exit or a Europe-wide monetary stimulus that helps the weaker countries by sending the euro lower.
Of the two, a stimulus is the second-best solution for Greece, as it won’t reduce its deficit with the rest of the eurozone. However, it would at least help make Greek exports to non-eurozone countries cheaper. It would also make the country somewhat less expensive for tourists. It also avoids the upheaval that would certainly accompany the early stages of a return to the drachma.
In short, Greece is going to get a weaker currency one way or the other – in the form of a weaker euro, or via a return to the drachma.
There are two ways to take advantage of this. One option is to short the euro against the US dollar. Since the shale gas boom is already helping reduce America’s trade deficit, the introduction of eurozone quantitative easing would hammer the euro. My colleague James Ferguson has a lot more to say about this in his New Year forecasts in the Christmas issue of MoneyWeek magazine, out today. (If you’re not already a subscriber, claim your first three issues free here.)
Of course, spread betting is risky, as you could well end up losing much more than your initial stake. If you are interested, you should sign up for our free email, MoneyWeek Trader.
Another idea - if you’re feeling brave - is to put money into the Greek stock market via the Lyxor ETF FTSE Athex 20 (Paris: GRE). While it is up 66% since we first tipped it back in June, it is still down over 77% from its launch three years ago.
Of course it’s high risk, so don’t stake your whole pension fund on it. (And if you’re looking for a less high-octane punt on Europe, you might be better going for a Europe-wide investment trust, or a less risky market). But if we’re right about eurozone QE, it could pay off nicely in the year ahead.
• This article is taken from the free investment email Money Morning.
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