How to Profit From the Great Greek Bankruptcy of 2012

Henry Dunant Hospital, a gleaming, state-of-the-art facility in central Athens, is one of the best medical centers in Greece. But ... the hospital's 1,150 employees, doctors included, have yet to be paid any of their 2012 salaries. Employees just received the final payment of their 2011 salaries at the end of May ...

Henry Dunant is one of a sharply growing number of Greek institutions and companies that aren't paying because they haven't been paid. Many employees aren't receiving their salaries -- certainly not on time and sometimes not at all. Businesses aren't paying each other. And the government isn't paying its suppliers or refunds owed to taxpayers. ... 'What is happening in this hospital is a microcosm of what is happening in Greece.'

Reading this passage from Tuesday's Wall Street Journal took me back to my years working for a small language institute in Russia in the mid-1990s. Years in which I, too -- and everyone I knew -- routinely went months without receiving a paycheck, and usually a paycheck for hours worked even more months before.

And that's only the beginning of the parallels between Greece today and Russia 14 years ago.

The Great Russian Default of 1998
When the Russian president went on national television on Aug. 14, 1998, and "firmly and clearly" declared that there would be no devaluation of the ruble, we knew we were in trouble. (Governments don't often "firmly and clearly" deny something unless they're actually seriously considering it.)

And so it was no great surprise when, three days after the denial, Russia devalued the ruble, defaulted on its debts, and declared a moratorium on all payments to foreign creditors. Within two weeks, the ruble had lost two-thirds of its value. Banks collapsed, savings accounts were vaporized, and price inflation soared to 84% by year-end. As for the stock market, the RTS had already started sliding in anticipation of the default ... but within six months had fallen a further 67%.

And then, a miracle happened.

After the fall
In a thinly veiled warning from the Wall Street establishment last month, the Journal groused that: "The idea that the money that has flowed out of Greece would flow back post-devaluation is fanciful, particularly given the current political instability." Likewise, 14 years ago, angry creditors warned Russia to forget about accessing international capital markets "for decades." ("You'll never work in this town again!") But greed is a funny thing.

Situated atop rich reserves of oil, natural gas, platinum, gold, and all sorts of other tasty commodities, Russia proved a prize bankers could not resist. And with its newly devalued currency making imports unaffordable, and exports incredibly cheap, it wasn't long before Russia was once again rolling in foreign-exchange reserves -- a fact investors were quick to notice.

Working off of a lowly base of 38 points, the RTS rebounded quickly. Within a year, it nearly quadrupled to hit 146 ... before continuing to shoot straight up. 750 points (April 2004). 1,740 (May 2006). And ultimately, 2,500 points (May 2008).

Granted, Russia's stock market has come down a bit since. (Whose hasn't?) But at last report, the RTS was hovering around 1,240, a 3,200% increase off its post-default lows.

History (could) repeat itself
Could it happen again, in Greece? The parallels are all there: Crushing debt. Economic dysfunction. A mathematical impossibility of making good on obligations to foreign creditors. Greek Socialist leader Alexis Tsipras looks at all these troubles, and sees only one solution: surrender. Default on the country's debts, exit the euro, and revert to a default (pun intended) currency, the drachma, instead.

But what happens then? Relieved of its debt burden -- whether through outright default, or by conversion of euro-denominated obligations into drachmae that Greece could print at will -- Greece might finally win itself some breathing room.

With its currency devalued, the cost of Greek goods would swiftly decline to the point where they could compete on the international mar ket. Businesses would thrive and hiring turn upward. It seems only logical that the Greek stock market would follow suit.

Don't play a starring role in this big, fat Greek tragedy
So how can investors position themselves to profit from all this, if events play out according to plan? First and foremost: with patience. The Athens Stock Exchange Index has fallen far already -- down about 63% over the past year. But Russia's RTS took a pounding prior to its default, too, and that didn't save it from sliding further post-default.

The low P/E ratios on stocks like National Bank of Greece (NYSE: NBG  ) or Coca-Cola Hellenic Bottling (NYSE: CCH  ) may tempt investors today, but have no doubt: They could get even cheaper in the event of an official exit from the euro. A "Grexit" could likewise spark selling of foreign-listed but Athens-based shipping companies such as DryShips (Nasdaq: DRYS  ) , Diana Shipping (NYSE: DSX  ) , and Excel Maritime (NYSE: EXM  ) .

Long story short, there will be a time to profit from the great Greek bankruptcy of 2012. But that time is... not yet.

As of today, no Motley Fool publications currently endorse buying (or shorting) any Greek stocks. But that doesn't mean we're fresh out of ideas for making a profit in 2012. Click here to read our free report on The Motley Fool's Top Stock for 2012.

Fool contributor Rich Smith does not own (or short) shares of any company named above. The Motley Fool has a disclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (20) | Recommend This Article (52)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 06, 2012, at 8:11 PM, jerryguru69 wrote:

    GREK

    note, however, the oversized position in CCH, plus the recovery of NBG stock after Grexit is not certain.

  • Report this Comment On June 06, 2012, at 9:57 PM, maiday2000 wrote:

    Russia actually had resources that fueled the rise of countries like China and India in the 2000's. Greece doesn't have produce anything worthwhile other than tourism. Apples and oranges.

  • Report this Comment On June 06, 2012, at 10:15 PM, Pat4Ra wrote:

    maiday, I agree with you. pat

  • Report this Comment On June 07, 2012, at 1:16 AM, azmfool wrote:

    Agreed. As I was reading the article, I had the recurring thought - Greece is no Russia. With nowhere near the resources, I just don't see the motivation to rush back in after a default (Only Fools rush in???)

  • Report this Comment On June 07, 2012, at 2:54 AM, Deathscythe22 wrote:

    Im inclined to agree with the last 3 comments. I do see some potential in this default, but as the original article said "Situated atop rich reserves of oil, natural gas, platinum, gold, and all sorts of other tasty commodities, Russia proved a prize bankers could not resist."

    The question is what does Greece have to offer?

  • Report this Comment On June 07, 2012, at 10:09 AM, joeCLC9 wrote:

    Olive oil? Tourism??

  • Report this Comment On June 07, 2012, at 10:30 AM, ryanalexanderson wrote:

    Why is everyone dismissing tourism? Yes, Greece has tourism. Greece is a small place. The debate is not whether or not Greece will become the next global superpower, it's whether or not its economy will be written off as garbage, and is actually worth more than garbage.

    Personally, I can't wait until Greece devalues and settles down to offer dirt cheap holidays in foreign currency. I'll sure as hell go!

  • Report this Comment On June 07, 2012, at 11:15 AM, TMFDitty wrote:

    Fair points, all. But in addition to olives, Greece also grows islands. Quite a lot of them, actually.

    When all that beachfront property goes on sale, for devalued Drachmae, don't you think it might entice a real estate investor or two?

    TMFDitty

  • Report this Comment On June 07, 2012, at 1:56 PM, Darwood11 wrote:

    I'm not into buying troubled assets, companies, or countries. If I were, I'd certainly look farther afield. In the current world economy, there is a lot of "troubled assets" out there.

    I'd suggest a better way to invest is to follow what the Chinese CIC is doing.

  • Report this Comment On June 08, 2012, at 6:02 PM, rma1344 wrote:

    They also have yogurt feta cheese ouzo and the acropolis and many beautiful islands where the rich and famous have property. Tourism will really pop if priced in cheap drachmas! Not sure if this is enough but real estate investors will come in droves to pick up the cheap property! Enjoy!

  • Report this Comment On June 10, 2012, at 11:23 PM, julcion wrote:

    LONG LIVE GREECE. A FINE COUNTRY RICH IN HISTORY, HEALTHY FOOD, HANDSOME MEN, BEAUTIFUL WEATHER, BEACHES AND RESORTS!

  • Report this Comment On June 12, 2012, at 5:55 PM, mythshakr wrote:

    One should also not be surprised by a Greek government decision on top of the above to outlaw foreign purchase or investment in all that real estate precisely because it would be so attractively cheap.

    Governments seem to have an aversion to "owned and operated by..." possibilities.

  • Report this Comment On June 13, 2012, at 1:06 PM, StopPrintinMoney wrote:

    if you wanna profit from the Greek collapse - avoid any exposure to its markets. Another recession is on the way and it will start in Europe.

  • Report this Comment On June 13, 2012, at 6:56 PM, Canuck2010 wrote:

    From the title of the article, I was expecting some short/put candidate suggestions for profiting on the way down,not merely a suggestion to wait until a possible turn around following bankruptcy occurs.

  • Report this Comment On June 14, 2012, at 5:57 PM, ravens9111 wrote:

    Greek Yogurt will be their top export for years to come. Better load up now. Maybe they find a way to make it with olives and feta cheese.

  • Report this Comment On June 15, 2012, at 11:38 PM, jaarsrep wrote:

    Oh, come ON, Rich!! Your article is titled "How to Profit from the Great Greek Bankruptcy..." --only to end up saying "...that time is ...not yet." It REALLY annoys me when you pull me in with a headline like that--and then dump me. Just quit it, OK? Call me old fashioned, but I learned in my journalism class that the headline should actually SAY WHAT THE ARTICLE IS ABOUT. Is that too much to ask? Thanks for listening, and I do appreciate the analysis. :)

  • Report this Comment On June 17, 2012, at 7:47 PM, gtbohrer wrote:

    You know...as it turned out, the day this article came out was the lowest day for NBG. Had you done what I'm increasingly doing with TMF analysts...that is, do the diametrical opposite of what they recommend...you'd be up 50% on it as I write.

  • Report this Comment On June 19, 2012, at 4:12 PM, Hawmps wrote:

    I don't see Greece "Situated atop rich reserves of oil, natural gas, platinum, gold, and all sorts of other tasty commodities" like Mother Russia.

  • Report this Comment On June 20, 2012, at 9:34 AM, pikeroi wrote:

    Greece ist not quite Russia: no resources, no geopolitical impact.

    also most of greece's debt ist under british law, which means that " conversion of euro-denominated obligations into drachmae that Greece could print at will" ist not an option.

    Keep researching.

  • Report this Comment On June 25, 2012, at 12:39 PM, sallyjohnson48 wrote:

    You have an informative page. You seem to know what you're talking about, but I'm not as educated in the financial world. I know that <a href="http://www.insolvency.net">bankruptcy calgary</a> can be a tough thing.

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