What happens if Greece, and eventually some of the other PIIGS (Portugal, Italy, Ireland, Greece, and Spain) come crashing down and default on sovereign debt? All of these countries, and the Eurozone in general, have high levels of government and external debt (as does the US, incidentally).
Many prognosticators have predicted a drastic fall in the Euro if Greece or other Eurozone countries default. A short term rise in the dollar would result, as investors flee the Euro to the world’s primary safe-haven currency. Since virtually all commodities are dollar-denominated, a rising dollar would force down commodities prices across the board, with oil, gas, agricultural commodities, and metals all affected. While gold’s direction is less clear given its safe-haven status, the deleveraging that would accompany sovereign defaults and the rise in the dollar would likely push down gold as well.
What about the direction of equity markets? It seems likely that markets would head down short term – though the market has shrugged off Greek default fears thus far, it seems to have priced in a bailout. A failure of the bailout package, or post-bailout default would definitely shake things up.
Most importantly, what about your portfolio? That’s a more complex question and depends on the interaction between your portfolio positions and the various macroeconomic risk factors I’ve discussed. And how can you profit from this scenario? UUP is an obvious play on the strength on the dollar, but what other positions can you take?
According to HiddenLevers Scenario Analysis, international ETFs and ADRs may suffer the most immediate impact in a default scenario, while treasury ETFs (TIP, IEI), and inverse-oil trades (DAL, UAUA, AMR, PAC, SCO) may see an immediate boost. The rise in the dollar will impact any equity which trades in a non-dollar currency, while the drop in commodities prices provides an immediate boost to heavy users of oil.
Click here to run this scenario on your own portfolio and see what specific impacts it might have.
Disclosure: No positions in the stocks and ETFs mentioned