Big Question: Will Greece Leave The Euro By Christmas?

Greece Greek Protest

AP

(Written by Rebecca Lipman. List compiled by Eben Esterhuizen, CFA)Let’s not downplay the importance of a possible Greek exit from the EU and all the consequences that could come with it. Greece’s retreat from the EU could be the event of the decade and a turning point for future political and economic trends.

The idea of it has already consumed the attention of financial speculators and coffee house chatterers, and it’s shaping up to be prime material for modern history textbooks around the world.

Let’s add to the discussion by drawing attention to the theory proposed by Michael Pettis of China Financial Markets, who makes a case that the EU cannot postpone Greece leaving the EU much longer.

In fact, he predicts Greece will make moves to exit the Euro by Christmas, and Spain and Portugal will follow next year.

He backs himself with historical evidence and by expanding upon Greece’s self-reinforcing loop “that almost always presages a collapse.” Interested?

We break his argument broken down to 10 bullet points here. (Find the full statement here)

1. Since France and Germany have basically exercised direct power over Greek’s electoral politics (by forcing Papandreou to cancel the referendum just days after he announced it) without assuming responsibility for solving Greece’s domestic problems, I can’t imagine that this won’t stoke even more resentment in Greece.

2. By openly acknowledging that Greece could abandon the euro, Europe’s leaders may have set in motion events that will automatically force Greece to leave.

3. Here is the logic. If Greece is ever forced to leave the euro, it will first have to redenominate domestic corporate and household liabilities into the new currency – let’s call it the drachma – or else domestic borrowers will be wiped out by the fall in the value of revenues relative to debt as the drachma immediately depreciates against the euro.

4. As soon as any depositor realises that bank deposits are likely to be redenominated into drachma, he will pull his deposits out of the banks so as to protect the value of his savings.

5. But obviously only a few depositors will be able to do this before forcing the bank into closing. In order to prevent the resulting collapse in the banking system, the only thing Athens can do is to freeze bank deposits long before most depositors have had a chance to cash out.

6. But depositors know this. As the probability of Greece’s leaving the euro rises… they will have to speed up their withdrawal of deposits from banks. And of course as anxious depositors withdraw their deposits, the likelihood of a banking crisis rises, and with it the likelihood of Greece’s being forced to freeze deposits and leave the euro.

7. Thus, “rational behaviour by individual agents leads towards a catastrophic event the threat of which reinforces the behaviour.” Getting out of the loop may require a “very unlikely but immediately credible announcement by Germany and France that they are prepared to guarantee all deposits in the Greek banking system.”

8. “There is in my opinion a very high probability that within weeks, or months at most, Greece will be forced to freeze bank deposits as a prelude to leaving the euro.” Mexico in 1994 and Argentina in 2001 chose the Christmas/New Year holiday season to announce their devaluations. Will Greece follow suit?

9. And it probably won’t end there. In my opinion the real risk for Europe in that case becomes a contagion of deposit withdrawal, not immediately, but at the first sign of trouble in their home countries (namely Italy, Spain, Ireland, Portuguese).

10. I suspect that in other countries too anyone who can afford to withdraw money from the domestic financial system is at least thinking of doing so. If this process accelerates it may be very hard to maintain domestic confidence in the local banking systems anywhere.

Not everyone is in agreement with Pettis, and the EU leaders certainly want to prevent a Greek exit at any and all costs. But his theory is not groundless – heavy deposits from banks could lead to a whole new ball game.

Do you think his theory could be played out? And would a Greek exit be orderly and smooth or would it be wise to expect, as Mike Shedlock of globaleconomicanalysis.com puts it, “a very disorderly, disruptive, and unplanned exit accompanied by bank closures?”

Investing Ideas

By now, everyone’s heard of Europe’s troubles. Investors are scared, and reducing their exposure to the region.

But we’ve found several examples of European stocks that have seen improvements in their profit outlooks, despite the recent weakness in Europe.

All of the stocks mentioned below have seen an increase in their projected profits, at a time when their stock prices have failed to match the increase in their projected earnings growth (i.e. a mis-pricing may have occurred). Are Europe’s troubles to blame?

If you’re a contrarian, this excessive bearishness should raise a flag. Use this list as a starting point for your own analysis.

analyse These Ideas (Tools Will Open In A New Window)

1. Access a thorough description of all companies mentioned
2. Compare analyst ratings for all stocks mentioned below
3. visualise annual returns for all stocks mentioned

List sorted alphabetically.

1. Credit Suisse Group (CS): Operates as a financial services company. Incorporated in Switzerland. The EPS estimate for the company’s current year increased from 3.55 to 3.68 over the last 30 days, an increase of 3.66%. This increase came during a time when the stock price changed by -4.2% (from 27.35 to 26.2 over the last 30 days).

2. Gentium S.p.A (GENT): Focuses on the development and manufacture of its primary product candidate, defibrotide, an investigational drug based on a mixture of single-stranded and double-stranded DNA extracted from pig intestines. Incorporated in Italy. The EPS estimate for the company’s current year increased from 0.34 to 0.35 over the last 30 days, an increase of 2.94%. This increase came during a time when the stock price changed by -0.82% (from 6.07 to 6.02 over the last 30 days).

3. Logitech International SA (LOGI): Designs, manufactures, and markets hardware and software products that enable digital navigation, music and video entertainment, gaming, social networking, audio, and video communication over the Internet, video security, and home-entertainment control. Incorporated in Switzerland. The EPS estimate for the company’s current year increased from 0.41 to 0.43 over the last 30 days, an increase of 4.88%. This increase came during a time when the stock price changed by 3.91% (from 8.69 to 9.03 over the last 30 days).

4. Nokia Corporation (NOK): Provides Internet and digital mapping and navigation services worldwide. Incorporated in Finland. The EPS estimate for the company’s current year increased from 0.32 to 0.36 over the last 30 days, an increase of 12.5%. This increase came during a time when the stock price changed by 10.02% (from 6.19 to 6.81 over the last 30 days).

5. Pearson plc (PSO): Engages in education, business information, and consumer publishing businesses worldwide. Incorporated in United Kingdom. The EPS estimate for the company’s current year increased from 1.26 to 1.29 over the last 30 days, an increase of 2.38%. This increase came during a time when the stock price changed by 2.02% (from 18.3 to 18.67 over the last 30 days).

6. Portugal Telecom SGPS SA (PT): Provides telecommunications services in Portugal, Brazil, and Africa. Incorporated in Portugal. The EPS estimate for the company’s current year increased from 0.94 to 0.95 over the last 30 days, an increase of 1.06%. This increase came during a time when the stock price changed by -5.74% (from 7.49 to 7.06 over the last 30 days).

7. Siemens AG (SI): Operates in the industry, energy, and healthcare sectors worldwide. Incorporated in Germany. The EPS estimate for the company’s current year increased from 10.19 to 10.3 over the last 30 days, an increase of 1.08%. This increase came during a time when the stock price changed by 0.62% (from 100.77 to 101.39 over the last 30 days).

8. Telefonica, S.A. (TEF): Provides fixed and mobile telephony services primarily in Spain, rest of Europe, and Latin America. Incorporated in Spain. The EPS estimate for the company’s current year increased from 2.33 to 2.34 over the last 30 days, an increase of 0.43%. This increase came during a time when the stock price changed by -4.41% (from 20.65 to 19.74 over the last 30 days).

9. Veolia Environnement S.A. (VE): Provides environmental management services to individuals, public authorities, and industrial and commercial services customers worldwide. Incorporated in France. The EPS estimate for the company’s current year increased from 1.37 to 1.41 over the last 30 days, an increase of 2.92%. This increase came during a time when the stock price changed by -9.03% (from 15.06 to 13.7 over the last 30 days).

Interactive Chart: Press Play to see how analyst ratings have changed for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


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