Why The European Crisis Matters to Smart Investors

At the end of last year, the Motley Fool editors asked me to contribute to a roundtable regarding "The Biggest Investing Danger of 2010." I chose 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, as investors began to focus on its abysmal financial position -- and that of the other Southern European nations.

World markets shrugged off the crisis -- until now
Nevertheless, it took months for the market to take the full measure of the risks inherent in this explosive situation -- in fact, that process is still under way today. Investors who still believe that the EU-IMF bailouts are 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 some U.S. 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's substantial demand from foreign nations for U.S. government securities, and the U.S. continues to enjoy unparalleled flexibility in 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 European episode. 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.

Even if we disregard the risk of a sovereign debt crisis in the U.S., the European crisis will have a direct impact on U.S. investors, as governments implement tough belt-tightening programs. Europe is already a laggard in the pace of its economic recovery (the eurozone and the EU barely eked out positive growth of 0.2% in the first quarter); fiscal austerity will do nothing to change that, and may slow it further. Lower European growth will hurt U.S. companies that derive substantial revenues from Europe, including the following:

Source: Capital IQ, a division of Standard & Poor's.
*EMEA: Europe, Middle East & Africa. 

The Fool is taking this seriously
The Motley Fool isn't underestimating this issue by any means; in fact, it has committed money and resources to understanding the risks and opportunities this European crisis presents for U.S. investors. How? Boots on the ground! In March, three of its top analysts, Tim Hanson, Nate Weisshaar, and Joe Magyer, traveled to 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 rarely found in white papers or ministerial briefings. This was no academic field trip or Congressional boondoggle -- they aimed to find actionable insights on behalf of Motley Fool Global Gains members.

Casting a wide net
Our analysts didn't limit themselves to the Athens Stock Exchange, either -- all publicly traded companies in the eurozone were 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 also 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, and the eurozone's largest economy.

3 plays to profit from the crisis
The trip more than paid for itself: Based on the insights they gleaned, Tim, Nate, and Joe returned with "3 Plays to Profit From the Greek Crisis" (subscription required). The most aggressive among these is National Bank of Greece (NYSE: NBG), but the three recommendations provide opportunities for investors with different appetites for risk. According to Tim's latest update, "all three remain worth buying or holding." If you'd like to read the original report and the updates contained the most recent newsletter issue, you can access it now by signing up for a 30-day free trial.

This article was first published on March 19, 2010 under the headline, "Why Greece Matters to Smart Investors." It has been updated.

Fool contributor Alex Dumortier has no beneficial interest in any of the companies mentioned in this article. Motley Fool Options has recommended a write covered calls position on GameStop. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.