Greece debt crisis unfolds
Greece has been experiencing credit crisis after it joined the euro bandwagon.
By Bloomberg |
LONDON: 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 all the time.
Last week, 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 didn't add up. There was speculation that a bailout was being organised by the European Central Bank, or the EU.
Greece's troubles seeped into the currency markets, dragging down the euro. Other euroarea bond markets, in Spain and Portugal in particular, took 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 may get them. Greece is in the spotlight, and it will have to come up with a credible plan.
The trouble is none of the options is very appealing. If the country gets serious about curbing its deficit, most of the growth of the last decade will turn out to have been illusory. If Greece begs its euro-area 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 percent, compared with 3.2 percent 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 area, 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 area at some point 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 area anytime soon?
Not likely. Short those bond markets as soon as you can.
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.
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 all the time.
Last week, 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 didn't add up. There was speculation that a bailout was being organised by the European Central Bank, or the EU.
Greece's troubles seeped into the currency markets, dragging down the euro. Other euroarea bond markets, in Spain and Portugal in particular, took 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 may get them. Greece is in the spotlight, and it will have to come up with a credible plan.
The trouble is none of the options is very appealing. If the country gets serious about curbing its deficit, most of the growth of the last decade will turn out to have been illusory. If Greece begs its euro-area 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.
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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 percent, compared with 3.2 percent 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 area, 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 area at some point 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 area anytime soon?
Not likely. Short those bond markets as soon as you can.
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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.
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