Tag Archive | "Greece exit from the Euro"

What Will Happen When Greece Leaves The Euro

Euro Break UpWhat will happen when Greece leaves the Euro? That is a question that is on many traders and investors’ minds, as a Greek Exit from the Eurozone economic bloc and Euro currency seems to be growing more likely with each passing day. What once seemed like a remote possibility, seems more and more likely as the European Union creditors and the leftist Greek government have made little progress on coming to terms regarding an agreement that will release additional funds to Greece. Beyond the political rhetoric and posturing, there are a number of real indications that a Grexit from the Eurozone and Euro currency may happen before the spring of 2015 is over.

What Will Likely Happen When Greece Leaves The Euro | The Internal View

Since it is growing more likely, traders and investors need to consider what will happen when Greece leaves the Euro. What happens internally within Greece and what happens in other countries will be totally different.

Internally, leaving the Euro is going to be hard medicine for Greek citizens to swallow in the short run, but in the long run it may be just what the doctor ordered to get their economy growing again. In the short run, Greeks can expect economic chaos and massive losses in their savings accounts, as the country reverts back to their own currency, perhaps the historic Greek currency known as the drachma.   In the long run, things likely will not be so bad. With control over their own currency, the Greek economy will have a currency with a realistic valuation. This will eventually lead to a return to economic growth, as foreigners see good value in Greek goods. The tourism industry in particular should see a nice uptick, as foreigners will be able to get good value when they travel to Greece.

What Will Likely Happen When Greece Leaves The Euro | The External View

What will happen in other countries both inside and outside of Europe is unknown. What is known is that the exposure that European governments and banks have to Greek debt is not as bad as it was in 2012, when Greece came close to defaulting and underwent a debt restructuring.

The European Union has been kicking the Greek debt can down the road for three years for good reason. Their delay in dealing with the Greek debt situation has allowed them to reconfigure things, so that a Greek debt default will not have as large an impact as it would have had if it had occurred several years ago without preparations. However, nobody knows for certain whether the European Union has done enough to wall-off financial institutions in Europe from a Greek debt default. Therefore, there may be some unpleasant surprises should Greece wind up defaulting and leaving the Eurozone in the near future.

The worst-case scenario is that a bank run develops in other weak European economies, which causes economic chaos in those countries and slows down already tepid economic growth in the European Union. That does not seem likely though because of the moves made by European financial authorities. Since 2012, the European Central Bank has set up financial institutions and mechanisms to aid member states that find their banking systems in trouble. This backstop has helped weaker Eurozone countries to shore up their banking systems and provide a level of confidence in their banking systems that should be enough to prevent runs on their banks.

Greece Leaving The Euro Could Cause Long Term Damage

The real concern of European Union members is not so much losing the tiny economy of Greece, but the potential implication that a Grexit night have on other countries that are in the Eurozone. The European Union was set up in a manner in which member countries were not supposed to leave. By setting a precedent with a Grexit, other weak member countries may be more inclined to leave the Eurozone, especially if populist parties are elected within those countries. This is the primary reason why European Union leaders have tried so hard to keep Greece in the Eurozone.   There is the potential that a Grexit could eventually lead to the unraveling of the European Union.

How To Trade a Grexit From The Euro

Greece Leaves The EuroWhat is the best way to trade a Greek exit from the Euro?   The answer depends upon your trading outlook. Short term traders can make money off any volatility that follows a Grexit. Swing traders that trade in the medium term, can position themselves for likely market swings that may prove to be profitable trading opportunities.   For those with a longer outlook, such as investors, a Grexit may provide an excellent opportunity to establish or add to positions in European equities.

Short Term Traders – Consider buying volatility Exchange Traded Funds (ETFs) that increase in price when stock market volatility picks up. While any volatility associated with a Grexit may be short-lived, it will likely be sharp enough to cause a tradable price increase in volatility Exchange Traded Funds (ETFs), such as ProShares Trust VIX Short-Term (Symbol:   VIXY) and Velocity Shares Daily 2x VIX Short Term (Symbol: TVIX).

Medium Term Swing Traders – Consider shorting European bank stocks that have Greek debt exposure. Also consider shorting European and emerging markets Exchange Traded Funds (ETFs). A Grexit will likely cause these securities to decrease in value.   Once the situation stabilizes after a Grexit, these same securities could provide good rebound opportunities on the long side.

Investors – Investors should not view a Grexit as a trading opportunity. Rather, they should consider a Grexit as an opportunity to put money to work in the stock market. A Grexit will likely cause European stocks and related funds to drop in value. This drop may provide a good opportunity to invest in Europe for the long haul.

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How To Trade The Greek Exit From The Euro

Greek Exit

While a Greek exit from the Euro is not a certainty, it is worth considering how to trade the Greek exit from the Euro currency Eurozone economic bloc, and European Union. The long-discussed Greek exit from the Euro has come to be known by the ‘Grexit’.   Whether it becomes a reality or not may have a major impact on financial markets around the world.

There has been talk of Greece’s exit from the Eurozone for a number of years, since Greece’s foreign debt load became so severe that they could no longer service their debt or obtain new financing in international credit markets. The debt situation became so dire that Greece required an international bailout in order to avoid defaulting on their government bonds.

The Grexit talk has picked up again, with a looming parliamentary election on January 25th that may result in the election of the Syriza party, which wants to exit the Eurozone and leave the Euro currency behind by reverting Greece to the Drachma currency. If this were to happen, it may have major investment impacts, which is why the implications surrounding the Greek exit from the euro need to be understood by investors.

Some Perspective The Greek Exit From The Euro


To understand why the Greek exit from the Euro may happen, it is important gain some perspective on the situation. Former governments that ruled Greece in decades past borrowed heavily in international markets. Normally, international creditors would have cut a county like Greece off when their debt limit reached unsustainable levels; however, past Greek politicians committed fraud and hid the country’s financial obligations from international creditors. The 2008 / 2009 financial crisis that rocked the world, reveled Greece’s higher than advertised financial obligations and it quickly became understood that Greece had borrowed much more money than its small economy could ever repay. International creditors then cut Greece off from the international debt markets, and Greece faced a crisis regarding how to make good on interest payments on their existing debts. After a lot of consternation and politics, the European Union, European Central Bank and International Monetary Fund bailed out Greece in 2010 and 2011 with a $285 billion bailout that restructured the country’s debt obligations.

Now Greece is faced with cutting back on public services, restructuring its economy, and paying back its restructured debt obligations.   This has not gone over well with the public in Greece. An anti-European Union far-left political party called the Syriza party is leading in polls in the January 25th parliamentary election. If Syriza wins, it could lead to a Greek exit from the Euro, which has major financial implications both inside and outside of Greece, including the United States. In the interconnected financial world of the 21st Century, major changes in even small countries like Greece can roil the financial markets around the world.

Unlike the past times when a Greek exit from the Euro seemed improbable, Germany now appears to be warming to the idea, which makes it possible this time around. Possible, but still not likely, as much of the talk may be political posturing for an eventual deal that lessens Greece’s financial obligations under their bailouts.   However, a prudent investor must be prepared for the worst case scenario of Greek exit from the Euro that could have major financial ramifications for their portfolio.

The Eurozone economy is fragile at best and any further shock caused by a Greek exit from the Euro could make a bad situation even worse and cause stock market sell-offs across Europe as well as the United States. A Greek exit from the Euro would also open up the possibility that other Eurozone members may consider an exit, causing uncertainty at a time when the financial markets need certainty.

Some Ideas Regarding How To Trade The Greek Exit From The Euro

Greece Leaving EuroThe following are some ideas regarding how to trade a Greek exit from the Euro. A major factor regarding how a Greek exit from the Eurozone and Euro currency would affect financial markets around the world depends upon whether the exit is done hastily as a disorderly exit or if it is done carefully. It is important to keep in mind that even if Greek authorities try to exit the Eurozone and Euro currency carefully, market forces often take over in these situations and cause unexpected outcomes. It is this uncertainty that traders can trade and need to prepare for.

In the run-up to the Greek elections, consider buying long-oriented volatility Exchange Traded Funds (ETFs) that have the potential to increase in price as stock market volatility increases, due to uncertainty regarding Greece’s exit from the Eurozone. Long-oriented volatility Exchange Traded Funds include: ProShares Trust VIX Short-Term (Symbol: VIXY). ProShares Trust VIX Mid-Term Futures Index (Symbol: VIXM), Velocity Shares Daily 2x VIX Short Term (Symbol:   TVIX), and VelocityShares Daily 2x VIX Med (Symbol: TVIZ).

After the Greek elections and once the situation regarding a pullout from the Eurozone becomes clear, consider buying short-oriented volatility Exchange Traded Funds (ETFs) that have the potential to increase in price as stock market volatility settles down, as uncertainty regarding the future of Greece’s role in the Eurozone diminishes and the stock market focuses on other factors. Short-oriented volatility Exchange Traded Funds include VelocityShares Daily Inverse VIX ST ETN (NYSE: XIV), ProShares Short VIX Short Term (Symbol:   SVXY), iPath Inverse S&P 500 VIX Short (Symbol: XXV), and   VelocityShares Daily Inverse VIX Mid-Term ETN (Symbol: ZIV).

If you want to try to trade the Greek equity markets directly, an Exchange Traded Fund (ETF) known as Global X FTSE Greece 20 (NYSE: GREK) is one way to invest in Greek stocks. Just be careful, since the direction of Greek stocks and GREK are quite uncertain as the country considers leaving the Eurozone and Euro currency.

There is a lot of uncertainty about what the Greek election result will be, since even if the Syriza party wins the election, it will likely need coalition partners to form a government. Based on public statements, other parties may not be on board with their plan to for a Greek exit from the Euro. In fact, the two leading contenders, the To Potami party and the New Democracy party are running on platforms that include remaining in the Eurozone. If nothing else, the scare surrounding a possible Greek exit from the Euro may create good trading opportunities in volatility securities and inr Greek stocks and securities, as well as stocks and securities in other countries.

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