Default could cause massive turmoil and possible short-term damage to a portfolio of Indian stocks.
A few years ago, Indian investors would have been incredulous if you had suggested the public finances of Greece would be critical to their returns.
If Indians thought of Greece at all, it was in terms of a holiday destination, or of the ancient historical connections from the time of the Mauryas.
Now, the possible default of that tiny European nation on the edge of the euro zone could cause massive turmoil and possible short-term damage to a portfolio of Indian stocks.
We could look on this situation as an opportunity, however, in several ways.
First, it is worth noting that the actual entanglement between Greece and the Indian economy is low.
Greece is a tiny economy — the majority of Indian states have higher gross domestic product (GDP).
Also, India has negligible trade contacts with Greece. So, any crash induced by Greece leaving the Euro would have a very temporary impact on India.
It would not really affect the earnings of Indian companies except in the indirect sense of what it might do to currency rates.
On the other hand, if the Greece crisis does get sorted out, even temporarily, there would be a temporary worldwide surge in equity values and also in the Euro.
The one thing we do know about this situation is that there will be continuous news flow with occasional crisis points.
It is coming at a time when India is short of hard news on the domestic front.
The first quarter results have been absorbed-the next dose of macroeconomic data will be released next month.
Parliament is in recess and it’s early days for the monsoon.
So, Greece will grab more attention on Dalal Street than it would in other circumstances.
There are many possibilities. First, Greece might crash out of the Euro zone.
This will hurt European lenders, especially Germans. It will probably mean a sharp crack in the Euro for a while.
It may mean a temporary breakdown in global equity values as well. In such circumstances, investors tend to flee to safety, which means US treasuries.
That implies the dollar could harden.
Second, even if the situation is patched up for the moment, any bailout will be temporary and conditional.
Greece will presumably be given a schedule to reduce outstanding debt and start repayments.
A bailout will, however, lead to a hardening of the Euro versus other currencies. It will also mean a surge in equity values, at least temporarily.
As those conditions are reviewed, maybe months down the line, there will be mini-crises or mini-rallies again.
It is an interesting situation. If Greece cracks, the trader can short equity indices such as the Nifty or the Sensex and also go short on the Euro.
That is, sell Euro-rupee futures contracts (because the Euro would weaken and you could reverse the position with a gain).
It might be worth going long on dollar-rupee because the dollar would very likely get stronger.
If a bailout is put together, go long Nifty/ Sensex and go long on the Euro-rupee.
Do not short dollar-rupee in this case because the dollar may strengthen anyway for other reasons.
There are strong reasons for Greece to default; there are equally strong reason for it not to default.
This situation will see temporary resolution, one way or another, fairly soon. We don't know which way it will go.
The trader should stay braced for a short term opportunity because when that resolution comes along, it will establish a trend.
Photograph: Reuters
