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How to Profit From Greece's Deficit Reduction Failure


Investors spooked by the prospect of a Greek default can find solace in currency ETFs.

The euro dropped to an 8-month low against the American dollar, as concerns over Greece's ability to pay its debts continued to put pressure on the eurozone currency. European stock markets were also down during Monday trading as investors worried about the effect that a Greek default would have on the economies of other European Community members. Financial stocks have been hit particularly hard because of their exposure to Greek debt.

The markets were spooked when the Greek government revealed that it won't be able to meet its deficit reduction targets. The news that despite a series of painful austerity measures Greece is still having trouble reducing its fiscal deficit was bad enough by itself, but it was compounded by the fact that in order to receive further bailout funds, Greece is obligated to prove that it is committed to deficit reduction. The latest news could be seen as a sign that despite promises to raise government revenue while cutting spending, the Greek government has been slower to act than it promised its international creditors.

German Finance Minister Wolfgang Schaeuble recently said that if Greece wasn't able to prove to a group of international creditors that it was committed to the financial reforms that it had agreed to in order to receive a bailout, that the next round of bailout funds would be withheld. Finance Minister Schaeuble made his comments after talks between the Greek government and the so-called troika of the International Monetary Fund, European Central Bank, and the European Commission broke off weeks ago.

The Greek government wanted the focus of the talks to shift to promoting economic growth, as opposed to austerity measures. One of the main problems with the austerity measures that Greece's creditors insist upon is that while they do meet the goal of cutting spending, they are less effective at raising government revenue because the damage they do to the Greek economy ends up lowering tax revenues. As tax revenue falls, creditors call for more budget cuts, which in turn lead to softening demand.

There is also widespread public opposition to the government's reforms because many Greeks feel that the reforms do nothing to help Greece and only benefit its creditors. There's some merit to this argument because the austerity measures have played a large part in Greece's fall into recession.

Investors who feel that the Greek government's failure to meet its budget targets could be what finally pushes the country into default might want to consider buying the ProShares UltraShort Euro (EUO) or the Market Vectors Double Short Euro (DRR). The euro already hit an 8-month low against the dollar but if Greece defaults, it could sink much lower.

While there are many who feel that the powers that be will do anything in order to avoid a Greek default, there are also many who feel that a Greek default is inevitable. There's also the concern that dealing with each Greek financial crisis by giving the country more loans is just a case of throwing good money after bad. At some point, even Greece's biggest supporters may be forced to throw in the towel.

Investors who feel that Greece will soon be cut off from international lenders may want to buy either the Japanese yen or the Swiss franc through the CurrencyShares Japanese Yen Trust (FXY) or the CurrencyShares Swiss Franc Trust (FXF) ETFs. The Japanese yen and the Swiss franc are considered safe haven currencies and should benefit from any further weakening of the euro.

Investors who feel that there is too much at stake for a Greek default to occur might want to take a look at the iShares MSCI Europe Financials (EUFN) ETF. If Greece avoids a default, European financial stocks could see a significant rise in share prices. The iShares MSCI Europe Financials ETF gives investors exposure to a large selection of European financial companies that will benefit if Greece avoids a default.

Editor's Note: This content was originally published on by Daniel James Hayden IV

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