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 of institutions based in the so-called "PIIGS": Portugal, Italy, Ireland, Greece, and Spain (see the table below), but the broader impact has been muted.

*By market capitalization. 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 has committed money and resources to understanding the risks and opportunities this European crisis presents for U.S. investors. How? Boots on the ground! Three of its top analysts, Tim Hanson, Nate Weisshaar, and Joe Magyer, are just back from Greece, where they gathered 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. This was no academic field trip or Congressional boondoggle – the mission was 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 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.

Three plays to profit from the crisis
The trip more than paid for itself: Numerous conversations with local insiders painted a picture at odds with the consensus view being reported in the U.S. financial media. Based on these insights, Tim, Nate, and Joe returned with 3 Plays to Profit From the Greek Crisis (subscription required). The most conservative among these involves taking positions in Philip Morris International (NYSE: PM) and the ProShares Ultrashort euro (NYSE: EUO). If you'd like to read the rationale behind all three ideas, the full report is available to Global Gains members -- you can access it now by signing up for a 30-day free trial.

This article was first published on March 19, 2010. It has been updated.

Fool contributor Alex Dumortier has no beneficial interest in any of the companies mentioned in this article. Philip Morris International is a Motley Fool Global Gains choice. Try any of our Foolish newsletters today, free for 30 days.