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Is Spain Secretly Rooting for a Greek Exit From Euro?


If Germany is committed to bailing out some of its friendly neighbors, then Spain's loan package is likely to be approved.

If Greece crashes and burns, might Spain be the winner?

My hypothesis here is simple: Greece leaves the euro because it can't get out of its own way. The rest of Europe rallies to support Spain and Italy to prevent the same debacle. In fact, I could see a scenario where Germany and others step in proactively on Spain and Italy before Greece implodes -- just to keep the dominos from starting their momentum!

Here is what we know about Greece:

Over the weekend, the Greeks went to the polls -- and so far this morning, the markets have yawned. The world will continue to watch as the winners from the election have three days to form a coalition government. The success of that effort will be watched more closely.

Even though the winning party was the party that supports remaining in the euro, there is no guarantee it can occur. Greece faces near-team cash issues and another deadline for austerity implementation. But the winning party and the runner-up party both want to renegotiate the austerity measures. Germany says it will not permit it. Greece may fall out of the euro even though it doesn't want that to happen. More than likely, the conclusion to the euro-exit is likely months away.

Here is what we know about Spain:
  • Bad: Record unemployment of 24%
  • Bad: Spanish yields are skyrocketing
  • Good: Lowest debt-to-GDP in its region at 79%
While the unemployment situation is worrisome, the country certainly has room for more debt (in the form of aid) to help fund its unemployment problem. It is the country in trouble that looks like the best credit risk in all of Europe. Think of it this way: If Germany is committed to bailing out some of its friendly neighbors, then Spain's loan package should be the most likely to be approved. It looks like the healthiest country among a lot of sick players.

So if Greece gets worse, look for Germany and others to be proactive and work with Spain to put together a package that can help it get through the problems.

For a US investor, the best way to play Spain is the ETF that covers the Spanish market: iShares MSCI Spain Index Fund (EWP). The EWP also has a solid options market, so you should be able to find the right hedge to sleep better at night with this position.

Editor's Note: For more from Wayne Ferbert, go to Buy & Hedge ETF Strategies.
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Position in EWP
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