George Soros: Greek Drama Will Create Lucrative Currency Trades

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A couple months ago, Greece came dangerously close to defaulting on its debts and leaving the EU. At the last minute, Greece and its creditors were able to come to an agreement that gave Greece enough money to last a few more months. In other words, they kicked the can down the road as politicians so love to do.

Everyone relaxed but now the new deadline is coming up soon. After examining the situation, hedge fund manager George Soros believes that the EU has been completely mismanaged and is heading to disaster. The good news for investors though is he also believes this could create some lucrative currency investments.

Why Greece is “heading down the drain”

In a recent interview with Bloomberg, Soros gave his thoughts on Greece and the EU. In his opinion, things are not looking good. At all. Right now the Greek government is not taking in enough money from tax revenues to fund its basic operations. As a result, it depends on loans from the ECB, the IMF, and the European Commission to stay solvent. In exchange for these loans, the Greek government had to commit to austerity measures to get its budget back in order.

This plan started coming apart in January when Greece elected a new far-left government that opposed the austerity commitments. The European lenders didn’t want to renegotiate the terms and Greece came dangerously close to running out of money, which would've prompted Greece to default on its debt and most likely leave the EU. At the last minute, the lenders gave Greece another lifeline to last a few more months so both sides could consider their positions. We’re coming up to the next deadline.

The Greek situation is a “lose-lose”

Soros does not have high hopes for the situation. He believes that it’s a 50/50 whether Greece will default on its debt and leave the EU. Best case scenario, Greece and its lenders will continue stumbling along with the same half-measures that won’t solve anything, but will at least keep the EU intact. He’s described the situation as a “lose-lose.” For anything to be fixed, both sides need to significantly change their mindsets. The EU creditors need to be willing to loosen up the terms for Greek aid and be open to forgiving some debt while the Greek government can’t completely give up on austerity, even if that’s what they promised to their citizens. This doesn’t seem likely which means Greece and the EU will continue struggling and we’ll constantly have to deal with the risk of Greece leaving the EU, even if it doesn’t happen now.

The bright side – “great opportunities” in the currency markets

Soros is a multi-billionaire and made his fortune primarily trading in currencies. While personally he’s upset about the EU situation, as an investor he sees opportunity. A “Grexit” would create large fluctuations in the currency markets. These price swings would be even more pronounced because the central banks are getting more involved in the markets with the ECB launching a new round of Quantitative Easing and the Fed potentially increasing interest rates later this year. Investors who get on the right side of these currency fluctuations would be in for a sizable gain.

The most obvious trade leading up to a “Grexit” would be to go long on the USD and short Euros. While the Euro has already fallen against the USD thanks to the ECB’s QE program, a “Grexit” could still add value to this trade. Morgan Stanley estimates that if Greece leaves the EU, the EUR/USD exchange would collapse down to 0.90, giving investors who long dollars and short Euros an 18% gain.

Another interesting trade would be to go long USD and short central European currencies like the Polish zloty and the Hungarian forint. Eastern European countries are struggling with weak growth, low inflation, and the war in Ukraine. If Greece leaves the EU and the Euro falls in fall, Eastern European banks would likely slash interest rates to depreciate their currencies so they wouldn’t fall in competitiveness with the EU and also to prevent the Greek crisis from spreading over to their systems. These currencies have gained against the dollar recently, even with the dollar’s strength, so they have more room to fall. If the “Grexit” creates a sudden reversal of this trend, investors who short the Eastern European currencies would likely see an even larger gain than from shorting the Euro.

Beyond these currencies, it’s difficult to say exactly how a “Grexit” would affect the market. So far, markets have been resilient and the Greek economy is relatively small compared to the EU and the United States so it’s possible the stock market will continue plugging along. Still, if a Greek default leads to other countries leaving the EU, stocks could take a large hit. Investors may want to hedge their portfolio, perhaps by moving some money out of stocks to either make currency investments or to buy gold to protect their savings.

Soros made his fortune finding value in grim situations. A Greek default and collapse of the EU would certainly be a disaster, but with the right investments it doesn’t have to be a disaster for your portfolio.