Greece, cradle of democracy and creator of souvlaki, has a gross domestic product of about $242.2 billion, or roughly half the assets of the Vanguard Total Stock Market Index fund. Why, then, does Greece wreak such havoc on the stock market?
In a nutshell, here’s why. Greece owes about €323 billion ($361 billion) to various creditors, the largest and most important of whom is the International Monetary Fund. But Greece’s biggest worry at the moment isn’t the €323 billion it owes in total, but the €1.6 billion ($1.79 billion) it needs to pay by the end of the month.
In the worst-case scenario, Greece defaults on its debt, leading to an exit from the Eurozone, the 19 countries that use the euro as a common currency. This could lead to crushing economic consequences for ordinary Greeks, who are already suffering under austerity measures so strict that they have been labeled “sado-monetarism.”
It could also mean that European banks who have loaned money to Greece could suffer potentially crushing losses. More worrisome, a Greek exit also means that weaker Eurozone countries (we’re looking at you, Portugal, Spain and Italy) could follow, prompting a wave of defaults.
All of which would eventually affect the U.S., because debt defaults rarely remain contained. A severe recession in the Eurozone could mean that U.S. banks would get tripped up, spurring yet another financial crisis here.
There aren’t any great answers. Forgiving Greek debt runs the risk of moral hazard — that is, the notion that other debtors could easily decide that the consequences of default aren’t all that bad. Restructuring the debt makes creditors deeply, deeply unhappy. Asking for more austerity could unseat the current Greek government.
For the moment, at least, Greece seems close to accommodation with its creditors, and stocks have rallied on another tragedy narrowly averted. But that simply sets the stage for the next big Greek debt payment crisis next month.
What’s an investor to do? One solution would be to sell short shares of a Greek exchange-traded fund, such as Global X FTSE Greece 20 ETF (ticker: GREK). But that would lead to extremely painful periods like the past four days, which has seen the fund rise 14%.
For those who don’t want to wager on the fortunes of a single country — and who are optimistic about an eventual resolution between Greece and its creditors — a better bet would be a diversified European fund, such as T. Rowe Price European fund, up an average 14.3% a year the past five years, and 10.2% this year. Vanguard European Stock Index would be the choice for index fans,
ETF investors have an interesting choice in Wisdom Tree Europe Hedged Equity, which tries to limit the effects of the currency market, currently the bane of international investors. Eurozone countries are up 15.4% this year in euro terms, but 8.7% when converted to U.S. dollars. The fund has gained 14.4% this year, vs. 10.3% for the unhedged Vanguard FTSE Europe fund.