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