Who Are The Biggest Losers Of The Greek 'No'?

By Ryan C. Fuhrmann, CFA | July 08, 2015

On Sunday, July 5, Greece held an election where its citizens voted against accepting European austerity measures that are intended to keep the Greek economy afloat and help keep Greece from exiting the Euro. The recent vote is seen as a step toward a “Grexit” where Greece ends up exiting from using the Euro as its currency and potentially a rather severe recession as it adopts its own currency and crippling debt load. Assuming a Grexit and extended recovery from its current woes, here are the biggest losers from the recent ‘no’ vote.

Tourists

It’s fair to assume that Greek tourism, which accounts for more than 15% of the entire economy, will take a significant hit from losing the euro currency. Nineteen Europeans countries currently use the Euro, which makes it easy to travel and not have to change out currency, make exchange rate calculations, and pay banking fees to change one currency for another. The major near-term challenge to tourism would be the interim period where the euro is not accepted and a new currency, such as the former Drachma (which was used before the euro was adopted).

In that vacuum, very little tourism or booking of future cruises and island hopping excursions, would occur.

On a happier note, it is assumed that Greece would devalue its new currency, which would mean a huge boost to tourism over the longer-term. A cheaper currency makes it much more affordable for foreign tourists, and could end up helping the Greek economy recover from its current depths.

But that would likely occur at least a couple of years after a bottoming of the market.

Greek Banks

The European Central Bank (ECB) is currently able to help the Greek economy and Greek banks stay on their feet during the heated austerity negotiations. Understandably, Greek citizens and other depositors to Greek banks are worried that they won’t be able to access the cash they have lent to their local banks. For that reason, the ECB is providing cash to certain Greek banks, and banks are trying to calm the nerves of their customers.

Clearly, the same currency vacuum that might affect Greek tourists would affect banks that count currency stability as their oxygen that helps them survive. Banks would have to physically swap the euro for a newer version of the Drachma, print new currencies, and adjust their systems to a new currency. It’s fair to assume that a new banking system would be needed, including a central bank to replace the ECB.

The entire process could take six months to more than a year, leaving a huge amount of uncertainty during that interim period on how the economy would function. Banks are the nerve center of the money supply, and many would likely fail, with a consolidation process to those able to survive.

Greek Creditors

European banks are estimated to be the largest holders of Greek debt. Banks in France, Germany, and Italy are said to be the top creditors. And as mentioned above, the ECB has lent Greece funds, as has the International Monetary Fund (IMF). Total debt is estimated at 360 billion euros. Any default would obviously hit the balance sheets of Greek creditors as these loans would likely have to be written off.

Economically, a number of market experts argue that Greece is so far underwater that it is a foregone conclusion that these debts are bad, regardless of the outcome of any austerity agreements.

An irony of introducing a devalued currency to help the Greek economy to recover is that Greek debt would most likely be redenominated in a new version of the Drachma.

A subsequent devaluation could further increase the value of the debt owed. This would create a vicious cycle of increasing further defaults. Again, at some point in the future the defaults would work their way through the financial system and a devalued currency would help the economy recover.

In the future, the current Greek creditors would lend to Greece again, just as occurred in Russia and Argentina, though disagreements could run into the decades, as they have in Argentina.

The Bottom Line

The extent to just how complicated a Grexit would be to the Greek economy is very difficult to know in advance. A country leaving the euro has yet to occur, and the worry is that more countries would follow once Greece leaves the common currency.

The Greek government appears to be digging in its heals rather than negotiate with its major creditors in earnest and this is adding fuel to the fire. It may end up the case that the Greek economy recovers more quickly by decoupling itself from the rest of Europe, but there is little question that the near-term hit to its tourists, banks, and creditors would be rather severe.

Who Are The Biggest Winners From The Greek 'No'?

By Kristina Zucchi, CFA

Greece’s vote of “no”, rejecting the bailout plan by the rest of the Eurozone countries, has created a stir among the EU and the rest of the world. Although many are speculating on the next moves by Greece and the Eurozone, led by Germany and its chancellor Merkel, the “no” vote carries with it the threat of Greece exiting the euro and the country facing a continuing financial standstill.

But unlike the Greek flare-up in 2011-2012, where European banks, private sector investors, and pensions owned Greek debt, much of Greece’s debt today is held by the International Monetary Fund (IMF), European Central Bank (ECB), and Europe's bailout fund, the European Financial Stability Facility.

If Greece exits the euro, it is estimated these lenders could lose more than EUR 200 billion! (See also European Union Breakup: Greek Euro Exit) Yet despite that staggering figure, there are some market winners from this “no” vote.

Potential Winners

Greece’s non-acceptance of the bailout plan is not bad for all market participants, especially in the long-term. It has created some winners for European and other global investors to put their money to work.

1. Sovereign bonds in strong European countries like Germany and France will see greater demand as investors look for areas of safety. Also, since the yields on government bonds from the other troubled countries (notably Italy, Portugal and Spain) increased only moderately--because prices fell less than many had projected after the vote--there could be an opportunity for the contrarian investor who believes, in the end, that these countries will benefit from the Greek negotiations and find ways to fix their economies, thus driving up the prices on bonds.

2. Foreign banks, particularly European banks who have exposure to Greece’s debt, are going to feel the pain as the market’s fears from this situation override common sense. But, according to the Bank for International Settlements, foreign banks have reduced their exposure to Greece by more than 80% since the 2012, from around $140 billion to $46.8 billion. The result: stocks that were sold off due to unwarranted concerns are now presenting a buying opportunity for investors looking to take advantage of the superfluous fear leading to oversold conditions.

3. As this situation plays out, the most certain outcome in the near-term is increased volatility. The euro, despite its fall leading up to and during the initial phases of this crisis, could actually be a winner regardless of the outcome. If Greece leaves the euro, you lose one of the weaklings pulling down an otherwise strong bunch. An exit, in the long run, could create a stronger currency union. If Greece stays, a unified union will, in the long-run, be considered more resilient than a fractured union. While short term volatility may drive euro trading, in the long term either outcome may benefit the currency, so long as the other strong participants stand together with one voice.

4. European listed equities as a whole may be lumped together and oversold as investors “throw out the baby with the bath water.” As such, finding companies with solid business fundamentals that are beaten down in the wake of this crisis present an opportunity to buy cheaply. Taking advantage of these opportunities should lead to strong returns as the markets normalize and trade more on fundamentals that emotional reaction.

The Bottom Line

The moral hazard that is associated with the Greek financial crisis is huge. But whether or not Germany and the rest of the Union forgive or restructure the debt, the markets will probably experience near term volatility as this plays out.

(See also How A Greece Crisis Affects The U.S.) However, in the long run, buying good assets that were sold off on emotional market reactions should lead to strong, long-term returns for the patient investor.