Where should you invest if Greece exit the Euro?

11 min Read Published: 04 Jul 2015

Where should you invest if Greece exit the Euro?

greece cliffThe IMF, the ECB and the EU first bailed out Greece in 2010 and Greece has been having to repay the debt ever since. It is an incredibly complex situation that few people truly understand.

To use an analogy, imagine if Greece was a person who couldn't get finance or loans from the mainstream creditors. It was therefore forced to go to payday lenders and loan sharks as a last resort. In the case of Greece these were the aforementioned institutions. These three institutions are collectively referred to as the Troika (which is derived from the Russian word for a group of three which strangely adds to the gangster feel of the whole thing).

Unsurprisingly the Troika periodically send the heavies (inspectors) in to Greece to make sure that they are keeping up their end of the bargain (financial reforms etc) to make sure they will get their money. All the while the Troika also release new funds (in tranches) as part of the original loan agreement.

How much does Greece owe?

Something like €245 billion and the repayments are now crippling the country. If you look at 2015 alone Greece has repaid around €17 billion but still has to repay more than €20 billion before the end of the year.

Like anyone in debt Greece is having to 'rob Peter to pay Paul'. Some of the money received in each tranche of the loan goes on interest payments on the loans that are already owed to the Troika. Bonkers I know!

Each tranche of money delays the day of Greek bankruptcy and means that public sector workers might get paid. The government is raiding every stash of cash to keep it's head above water. It is even demanding that hospitals hand over cash on account while there are reports of the Greek fire service having to go door-to-door with cap in hand.

When each new tranche of bailout money is due to be paid to Greece, the heavies put the frighteners on them and Greece tries to squirm out of its commitments. Usually at the 11th hour both sides reach a compromise and the tranche is paid and Greece avoids bankruptcy for a while longer.

Crunch time - this time is different, or is it?

In January 2015 a new Government was elected in Greece with an anti-austerity mandate. Since then the new Greek Government has been pushing back against any reforms agreed by the previous Government as part of the original bailout.

So we now find ourselves at a point where Greece has taken it upon itself to delay the four regular payments, totalling €1.5 billion, owed to the IMF that were due at the end of June. Technically it has now defaulted on this payment. Greece also needs to find €2.2 billion to pay pensions, social security benefits, public sector salaries as well as keep public services going.

The problem is that Greece needs a final €7.2 billion payment from the previously agreed bailout package which is also now due. But obviously tell a loan shark you are not going to pay him but that you need to borrow even more money and you can imagine what happened. Rather than kneecaps being broken, in the world of politics the Troika walked away from the negotiating table and both sides are further apart than ever before. The situation has become even more strained because the Greek Government has decided to call a referendum for the 5th July to allow the people to decide on the implementation of more austerity measures.

So metaphorically Greece is threatening to jump off the precipice (default on its debts) and the Troika are nervously watching on while the rest of the world (even Obama) are shouting from the sidelines 'come on Greece stop being so stupid and get down form there!'

So is Greece about to exit the Euro?

If I was a betting man and wanted to put money on the possibility of Greece exiting the Euro then I couldn't, as William Hill actually stopped taking bets on that outcome a while ago. Of course a bookmaker's odds only reflect punters' opinions of what is likely to happen rather than reality itself. Yet it gives a good sense of that things are looking ominous.

So, everyone is now holding their breath waiting for the outcome of the referendum to see what is the next episode in this Greek tragedy. If some sort of an agreement isn't reached soon in theory Greece would have to default on its repayments (and not just miss them). There are also other repayments that will come thick and fast. On 20th July it has to pay €2 billion to the ECB and if it ends up defaulting on that as well then the problems could get worse. The ECB had been propping up Greek banks but has now limited its assistance.

The inevitable result has been that Greek citizens have rushed to withdraw their money from Greeks banks in panic and capital controls had to be enforced (i.e stopping people withdrawing their money freely) which never ends well. Greece may well end up being forced to leave the Euro and ultimately the eurozone.

Is a Greek exit likely?

Never underestimate the capacity for politicians to fudge something together but time is almost up. Interestingly just last week the Financial Times recently reported that a third of institutional investors (investment banks and the like) think a Greek exit will happen..... but by the end of May 2016. If you asked them the question this week the answer would undoubtedly be different.

What should investors do?

You'd think that the market would have already priced in the possibility of a Greek exit, after all the Greece saga has been like a slow-motion car crash. Yet equity markets have taken a hit this week. The FTSE 100 is down almost 5% in the last 7 days as the Greek crisis worsened and that is before Greece has even exited the Euro..

However, research by Bank of America Merrill Lynch recently found that fund managers are unprepared for a Greek exit from the euro. In fact 43% still expect a deal to be done at the 11th hour while 42% think that Greece will default on its debts but won't exit the eurozone.

Or in other words don't expect a fund manager to protect your money in the event of Greek exit. If you are worried about the impact of a potential Greek exit on your portfolio then the only safe place to be is in cash (but clearly not in a Greek bank).

Funds for a Greek exit

While the safest thing to do is to hold cash, are there any funds that seem particularly prepared for a Greek exit or at least better placed than their peers to navigate one? How might you even find them given that we've never experienced a Greek exit before?

One of the benefits of being an 80-20 Investor member is that I teach you the process to go about answering these sorts of questions. My analysis was carried out on over 3,000 and published in full for 80-20 members benefit two weeks ago, long before the crisis took a turn for a worse and markets tumbled. I even taught them how to do it for themselves.

Below is a brief summary of the types of funds which were picked after my analysis. There were in fact 20 funds which you can see if you become an 80-20 Investor member. You can take advantage of a Free 30 Day Trial. Below I reveal one of these funds.

So if there is a Greek exit then those things most likely to weather the storm are:

  • short dated bonds (i.e those which are just about to mature)
  • the best quality bonds (from companies and countries unlikely to bust - i.e UK)
  • bricks and mortar property funds
  • funds that use hedging strategies to avoid such events
  • and certainly not equities

However, one fund which should weather the storm better than its peers is Insight Absolute Insight.

To see the other 19 funds simply take advantage of a Free 30 Day Trial of 80-20 Investor.