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Greece ETF Crashes as Political Uncertainty Returns

Zacks Equity Research

The year 2014 has put the Euro zone in dire straits. If region-wide deflationary worries, renewed recessionary concerns and Portugal banking crisis were not enough, the latest political strife in Greece and the resultant stock market crash brought along enough distress for the region and its economy.

The latest bout of conflict led Greek stocks to register the biggest single-day slide in 27 years. Meanwhile FTSE Greece 20 ETF (GREK) –  the only pure Greek ETF-- tumbled 11.9% on December 9th.

What Happened in Greece?

The jitters stemmed from the Greek Prime Minister Antonis Samaras’ surprise decision to bring forward the parliamentary presidential vote by two months to December 17. The second round of voting will take place on December 23, and the third round will be on December 29. If Samaras fails to win the support of 25 opposition lawmakers, he will have to declare a snap national election which the anti-austerity party Syriza has a high chance to win.

Investors should note that the latest election will be carried out by Greece's legislators, and not by the people. Anti-bailout party Syriza presently leads the opinion polls. The downside issues with Syriza are that the Party is against austerity measures, market-friendly initiatives and the international bailout program that arguably gave the Greek economy a fresh lease of life during the height of its debt crisis and saved its sovereign bonds from defaulting.

Apparently, Samaras’ decision appears well timed. Continuous negotiation between Athens and the EU on imposing stricter austerity measures for the last lot of bailout loans has led the Euro zone finance ministers to defer bailout talks to early next year. Soon after this, Samaras proponed an election date to solidify its negotiating stand and stay away from lingering uncertainty.

Why the Market Crash?

Investors viewed Samaras’ decision as desperate and punished global stocks badly with Greek bourses being hurt the most, for obvious reasons. The Athens benchmark index plummeted 12.8% on December 9.

After all, investors always seek a pro-growth leader and would like to see the continuation of the governance under which the Greek economy logged 0.7% GDP growth in the third quarter. This was especially noteworthy given the anemic economic condition of developed Europe.   Investors should note that the Greek government had managed to attain a primary surplus this year, well ahead of schedule (read: What is Behind the Greek ETF Surge?).

Investors witnessed Fitch upgrading Greece’s long-term credit rank by one notch to B with a stable outlook, though the rating is still reeling in junk territory. Fitch solely attributed the improved fiscal efficiency to the upgrade. All these mean a lot to a nation which has ended suffering a long six years of recession and was the epicenter of the Euro zone debt crisis (read: Euro Zone Gets QE Hints, 3 ETFs to Buy on Stimulus Hopes).

Bond Yields on Rise

The proponed election news took the 10-year Greek government bond yields to the high of 8.09% on December 9 − a tough level at which the government will not be able to continue borrowing for long if it leaves the undesired bailout program and manages to finance itself in the debt market, as per Reuters. However, it is worth remembering that this is nothing in comparison to the all-time high of 48.60% seen in March 2012, yields jumped more than 100 bps in a single day.

ETFs to Watch

Since many investors fear that the Euro zone debt crisis is likely to flare up once again, investors should keep track of the Greece ETF – GREK – and the likes of broader Europe ETFs. Falling Greek shares spread ripples over the rest of Europe. The Stoxx Europe 600 Index descended 2.3% following the Greek carnage.

Source Euro Stoxx 50 ETF (ESTX) lost 1.29%, SPDR STOXX Europe 50 ETF (FEU) dropped 1.09%, SPDR Euro Stoxx 50 ETF (FEZ) retreated 0.9% and FTSE Europe ETF (VGK) was down more than 0.9% on the same day. So far this year, GREK was down 32% while VGK was down 4.3% (read: New EuroStoxx 50 ETF Hits U.S. Markets).

Moreover, ETFs with the significant allocation to Greek stocks could shed gains in a few upcoming trading sessions. Some of these funds are SPDR S&P Emerging Europe ETF (GUR) with 7.80% exposure to this troubled nation, Cambria Global Value ETF (GVAL) with about 7% weight and SPDR EURO STOXX Small Cap ETF (SMEZ) with 5.93% focus. Each of these ETFs lost in the range of 0.5% to 0.8% yesterday.

Interestingly, though Greece is categorized as an emerging market (EM.V), it has fewer features of EM nations. Unlike Greece, most emerging market governments strive hard to contain inflation. Moreover, emerging markets normally have low debt to GDP ratio than developed nations while debt is a huge concern for Greece. Broader emerging market ETF iShares MSCI Emerging Markets (EEM) did retreat 0.94% on December 9, but it was probably a reflection of issues in China.

Going forward, if anything as severe as 2012’s debt debacle happens, emerging market ETFs might see a moderate selling pressure as an aftershock of the incident. These funds are less likely to feel a direct adverse impact though, and large emerging markets like China and India are more likely to drive these funds instead. 

Bottom Line

The Greece ETF, along with some broader Europe ETFs, is sitting on the fence now with pains and gains on each side. It is hard to imagine at this stage that if leftist party Syriza wins, how things will turn out for Greece. Some initial sell-offs are obvious if such a thing happens. So, let’s wait for December 17 to see what lies ahead for the Greek ETF.

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