Why Greece Matters to Smart Investors

At the end of last year, the Motley Fool editors asked me to contribute to a roundtable on the theme, The Biggest Investing Danger of 2010. I chose to highlight sovereign credit risk, noting that, "If the debt crisis of a city-state [Dubai] with the economic heft of Arkansas can upset equity markets, imagine the impact of a fully blown crisis in a Eurozone nation." Sure enough, Greece did trigger a European crisis in this first quarter, as investors focused on this Southern European nation's abysmal financial position.

World markets shrug off a new crisis
And yet, despite some volatility, world markets appear to be taking this episode more or less in stride. Sure, European bank stocks have come under a certain amount of pressure, particularly those belonging to banks based in the so-called "PIIGS": Portugal, Italy, Ireland, Greece, and Spain (see the table below), but the broader impact has been muted. The iShares MSCI EMU ETF (NYSE: EZU  ) , which tracks the performance of shares in European Monetary Union markets, is down just 5% year-to-date against a 4% gain for the iShares S&P 500 ETF (NYSE: SPY  ) .

Stock

Country

Price Return (YTD)

Banco Bilbao Vizcaya (NYSE: BBVA  )

Spain

(23%)

Banco Santander (NYSE: STD  )

Spain

(17%)

National Bank of Greece (NYSE: NBG  )

Greece

(23%)

ING Group (NYSE: ING  )

Netherlands

0%

Deutsche Bank (NYSE: DB  )

Germany

3%

Source: Capital IQ, a division of Standard & Poor's.YTD = year to date.

Don't take the shortsighted view
All the same, investors who believe this is the end of the matter are taking a shortsighted view, preventing them from giving full consideration to a series of risks and opportunities.

The U.S. is not Greece
Perhaps many investors are pooh-poohing the Greek crisis on the basis that there is little reason to expect an imminent crisis in U.S. government debt. That's true enough; after all, the U.S. dollar is the world's reserve currency (i.e., the assets held by foreign countries' central banks are largely denominated in dollars). As a result, there is substantial demand from foreign nations for U.S. government securities, and the U.S. continues to enjoy unparalleled flexibility in terms of funding its deficits.

… but it's dangerous to minimize this trend
However, it would be a mistake to believe that there are no lessons for investors in this Greek tragedy. As Mohammed El-Erian, the CEO of giant bond fund manager PIMCO, wrote in the Financial Times on March 10: 

Today, we should all be paying attention to a new theme: the simultaneous and significant deterioration in the public finances of many advanced economies. At present this is being viewed primarily -- and excessively -- through the narrow prism of Greece. Down the road, it will be recognized for what it is: a significant regime shift in advanced economies with consequential and long-lasting effects.

The Fool is taking this seriously
The Motley Fool isn't underestimating this issue by any means; in fact, it's committing money and resources to understanding the risks and opportunities this European crisis presents for U.S. investors. How? Boots on the ground! Next week, three of its top analysts, Tim Hanson, Nate Weisshaar, and Joe Magyer, will be in Greece to gather local intelligence from leaders in the business and financial communities … and from the man on the street, who can sometimes provide key clues that are rarely found in white papers or ministerial briefings.

Indeed, this is no academic field trip or congressional boondoggle -- Tim, Nate, and Joe are looking for actionable insights for their Motley Fool Global Gains members. It's not unusual for this type of crisis to produce losers and winners among stocks. Losers are legitimately exposed to the cause of the crisis; winners, on the other hand, can be had on the cheap because investors tar them with the same brush for the wrong reasons.

Casting a wide net
Our analysts won't be limiting themselves to the Athens Stock Exchange, either -- all publicly traded companies in the Eurozone are fair game, including many prominent companies with shares that trade on U.S. exchanges. After all, the genesis of this crisis lies not only with Greek profligacy, but with internal imbalances between Eurozone countries. Greece (along with several other Southern European nations) runs substantial current account deficits. Germany, on the other hand, is the world's second-largest exporter on top of being the Eurozone's largest economy.

Join us on the trip!
If you're interested in following Joe, Tim, and Nate's progress and receiving their insights on a timely basis, add your email address in the box below. At a time when some experts are predicting U.S. stocks look likely to produce mediocre returns in the next few years, farsighted investors know that they can't afford not to consider farther-flung opportunities. We expect this crisis to be a source of just such opportunities. Here's your chance to join our three analysts as they seek to unearth them.

Fool contributor Alex Dumortier has no beneficial interest in any of the stocks mentioned in this article. The Motley Fool has a disclosure policy.


Read/Post Comments (17) | Recommend This Article (47)

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 March 19, 2010, at 5:37 PM, felyons wrote:

    because of the lack of any regulation, won't the same bandits responsible for the bulk of the financial universe's current mess be able to wreak havoc with profligate use of credit default swaps against Greece (and whomever else that looks ripe, say Dubai, or Ireland, or,,,)?

    when can we expect any movement to forestall such gaming with the financial system?

    your crystal ball doesn't go there, probably...

  • Report this Comment On March 19, 2010, at 8:08 PM, clamsoe wrote:

    It seems odd that your "boots will be on the ground" in the place where the stuff has already been through the fan. Where we need boots is in the next most likely place the stuff is likely to fly. How can the man on the street know anything but what he's been told? Maybe some very smart people, and I include you at "The Fool" in that group, should use the freedom of information act appropriately as you see fit in this country. We are in some trouble here. you know.

    Trusting but wondering,

    Clamsoe

  • Report this Comment On March 19, 2010, at 8:10 PM, TMFAleph1 wrote:

    @felyons,

    Thanks for your comment. Greece's current difficulties have nothing whatsoever to do with credit default swaps. Nothing.

    See, for example:

    Sovereign Credit Default Swaps: Smokescreen, The Economist, Mar. 11, 2010

    http://www.economist.com/research/articlesBySubject/displays...

    Best,

    Alex Dumortier, CFA

  • Report this Comment On March 19, 2010, at 8:53 PM, mberan wrote:

    Having lived in Greece it's no surprise what happened. Complete lack of government oversight, the Greek "game" of not paying income taxes, overpaid union workers who don't work. Nothing will change here and it will only be when the EU kicks them out that changes will happen. Except for feta cheese, olives and olive oil and some shipping what does Greece contribute to the EU and global economy?

  • Report this Comment On March 19, 2010, at 10:32 PM, fireflypop wrote:

    Should you not be looking closer to home, in fact just looking North at investment opportunities in Canada? It seems the rest of the world is... Just check the recent rsie in the Canadian dollar.

    Canada has had no banking crisis. Not a single bank failed since the Depression. Yes we did learn our lessons and since then stringent rules were introduced which enabled the Canadian Banks not only to survive the crises of the past couple of years but to put themselves in a position financially, flush with cash, to look at major acquisitions worldwide.Just take a look at RBC, CIBC, Scotiabank to name but three. Many Governments around the world are now citing the Canadian Banking system as the model to be followed in the future.None too big to fail if failure in the works.

    Also few Americans know that Canada is the largest supplier of Gas and Oil to the US with unlimited access through a Free Trade Agreement. Under this agreement there is trade of $2 billion daily between the two countries.Look alsoat access to other natural resources such as Potash... the opportuinites are endless.

    Look North ladies and gentlemen, investors across the ponds in Europe and Asia are already doing so.

    .

  • Report this Comment On March 20, 2010, at 1:05 AM, Quick2learn wrote:

    The markets knees knock when news like Greece hit the fan, and then India raises its interest rates while the US's stay flat what forever? The market place is basing its days on things like records of nine days in a row of gains. Something that has not happened since 1996? The signals are out there, low volume, a teter toter effect that earlier in the week the US's Moody's rating came into question, is this all a house of cards starting with Greece, Ireland, GB?

    What is the positive play then fools?

  • Report this Comment On March 20, 2010, at 3:56 AM, dinobaba wrote:

    WOW! The Fool is sending an armada to Greece to find out what the Greeks think about the world economy. LET'S ALL BUY GLOBAL GAINS QUICK, AHHHHH!!!

  • Report this Comment On March 20, 2010, at 4:25 AM, dinobaba wrote:

    WOW! The Fool is sending an armada to Greece to find out what the Greeks think about the world economy. LET'S ALL BUY GLOBAL GAINS QUICK, AHHHHH!!!

  • Report this Comment On March 20, 2010, at 7:01 AM, byzantic wrote:

    @mberan is mostly right - since Greece joined the EU its govts have failed to implement the necessary reforms.

    However the present govt is different, and the acuteness of the crisis now combine with the inescapable outside pressures to force through those changes which in the past were too risky politically.

  • Report this Comment On March 20, 2010, at 7:02 AM, byzantic wrote:

    @mberan is mostly right - since Greece joined the EU its govts have failed to implement the necessary reforms.

    However the present govt is different, and the acuteness of the crisis now combine with the inescapable outside pressures to force through those changes which in the past were too risky politically.

  • Report this Comment On March 20, 2010, at 8:02 AM, theboo1 wrote:

    I recommend someone reads Paul O'Connor, RealMoney Contributor, On Wednesday March 17, 2010 "The Celtic Tiger Bites Back!" He states the pricing of Irish sovereign debt for 2009 has reversed. "CDS rates for Irish sovereign debt have contracted to 115 basis points, while Greece is looking at rates 170 bp higher, at 285 bp." Additionally, he mentions the Irish debt-to-GDB ratio increased to 65% by the end of 2009, i.e lower than the European average. In other words, Ireland is unfairly placed in the PIG category.

    Finally, Mort Rosenblum, former editor of the International Herald Tribune, wrote an interesting book on olives "Olives: The Life and Lore of a Noble Fruit". In it he goes into great detail about how crooked the Greek olive industry compared to other European growers. Comparing these two countries are like comparing apples to oranges.

  • Report this Comment On March 20, 2010, at 8:17 AM, EuroBob7 wrote:

    Hmm - Ireland may be a perfumed pig but she is a pig nevertheless. The banking system is a train wreck with ALL banks unable or unwilling to lend to business as they scramble to rebuild their ravaged balance sheets. The government has a fixation about not letting its pals (sorry the banks) fail - only time will tell if this is the correct strategy. However Ireland and Greece are tiny in euroland the elephant in the room is Spain whose unemployment is approaching a revolution inspiring 20% and higher in the rural areas. Now Spain could wreck the euro more than anything Ireland or Greece could do. On the positive side the Spanish banking system is in good shape (compared to others in euroland) so again time will tell. Looking forward to comments from the little trip.

  • Report this Comment On March 20, 2010, at 1:43 PM, TMFAleph1 wrote:

    EuroBob7,

    Thanks for your comment. Don't forget Italy; see, for example:

    Is Itlay the real joker in the eurozone pack? FT, Mar. 16, 2010

    http://tinyurl.com/ybpqzfb

    Best,

    Alex Dumortier, CFA

  • Report this Comment On March 20, 2010, at 6:32 PM, sentinelbrit wrote:

    Greece should not have the euro as its currency. Why should an economy like Greece's have the same monetary policy as Germany - it is ridiculous. Therein lie the seeds of turmoil for the EU. However, I have said for some time that the EU will come to the rescue of Greece for the simple reason that not doing so would deal a major blow to the ideal of a Federal Europe.

  • Report this Comment On March 21, 2010, at 3:07 PM, Gorm wrote:

    If nothing else, Greece is an early indicator that fiscal irresponsibility does have its day of reckoning. There is no more low hanging fruit. As costly debt service erodes their spending options, they are starting to feel the pain and are uncomfortable there is NO apparent light at the end of the tunnel. You can't grow big government, retire employees early and pay long term pensions, enable the affluent to skip paying taxes without consequences.

    Given all the PIIGS problems, Greece is but the first. Hopefully, the US is reading and heeding as we cannot keep wasting borrowed money without severe ramifications down the road. Just imagine with our recent surge in debtload what even a modest risk in rates would do to our national budget!!

  • Report this Comment On March 21, 2010, at 6:47 PM, plange01 wrote:

    greece just doesnt matter at all...

  • Report this Comment On March 22, 2010, at 11:58 AM, sofpan wrote:

    Dudes I live in Greece.

    I don't say that Greeks are saints but they are not financial criminals (the people of Greece).

    But yes, the greek governments of the last 30 years were corrupted.

    See this:

    http://www.youtube.com/watch?v=AbH1JsOTInk&feature=playe...

    and read this:

    http://www.independent.co.uk/opinion/commentators/john-lichf...

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