Investing in a Greek Default

Brittney Barrett |

The potential for Greece defaulting on its debt is weighing heavily on the market and while some investors are simply leaving, others are assessing how they can gain from the current state of affairs.  The S&P recently reduced Greece’s rating to CCC, the lowest of any nation in the world, alongside the reality that a default has become more of a reality than a question at this point. Unemployment is up 40 percent to 16 percent this in the past 52-weeks, proving last years rescue was not enough to help Greece pull itself back up. So what does that mean?

Surely American banks have a degree of involvement in Greek debt, with Bank of America being the institution with the highest exposure at around $450 million. For the most part though American banks interest in Greece is mild enough that the crash would not put a major strain on them.

The same can’t be said of French and German banks which can be expected to endure enormous consequences. French banks are especially at risk with around $57 billion in Greek Exposure. Moody’s has even considered downgrading the top three French banks on the basis of the potential default. So far; however BNP Paribas (BNP), Societe Generale (CSGLY) and Credit Agricole (ACA) have maintained ratings. German banks have $34 billion in exposure, a factor that could significantly impact German financials.

Beyond Germany and France, there is a potential that other weak nations, like Ireland and Portugal will also be pulled down into a recession by the reverberations of a Greek default, meaning the euro as a whole will endure considerable damage.

This, theoretically, will positively influence the prices of Gold and the dollar

People often pour money into gold whenever another currency is showing weakness and the potential impact of a multi-national European financial struggle and the manner in which that would shake the euro is the most extreme example of this. Many analysts are even predicting the Euro will be eliminated in as little as five years. If that is even half right, a Greek default will mean major gains for  the price of Gold. An investment in SPDR Gold Shares (GLD) could be wise at this time.

 

The dollar, having had fewer ties to the Greek default will emerge as the natural victor between the two. A weak euro generally means a stronger dollar. The euro is no longer a contender for a global currency at this point, meaning that investors will recognize its reign will continue atleast for another couple of years. The strength of the dollar will gain on that sentiment.

A stronger dollar also means more European travel. Back when France was still using the Franc, renting a house on French Riveria could be cheaper than a jaunt to the Hamptons. With the dollar exceeding the strength of the euro, traveling will become less pricey, giving northern Europeans and Americans more incentive to head to Western Europe. That will help the tourism industry in those nations.

Airlines that specialize in International travel, aircraft manufacturers like Boeing (BA) and websites like TravelZoo (TZOO) and Expedia (EXPE) will all be given a boost.

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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