Three Ways To Play A Euro Break Up

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Greece is currently going through a crisis that is producing a deep depression: unemployment is at 25%, GDP contracted by 6% in 2012, and debt to GDP stands at 170%. The natural way out of this kind of crisis is a nominal currency depreciation. Being in the Eurozone, Greece can not manage its own monetary policy, and thus it can not depreciate unless the country drops the Euro. Today a Euro break up is a remote possibility. But if it happens, what does financial history teaches us? History indicates that if a country abandons a currency peg, opportunities abound. Let's review some of them.

GREK (NYSEMKT: GREK) is the ETF that replicates the performance of 20 Greek companies trading at different exchanges. The ETF, which has a costly 0.71% annual total expense ratio, trades at par with Net Asset Value (NAV) and is a conservative way to play Greece's performance. Its main asset is the Greek Coca Cola bottler, Coca Cola Hellenic (22% of assets). This asset is followed by OPAP (which we shall review next) and Public Power Corp (the country's main utility provider). This is the way to go for conservative investors.

OPAP (NASDAQOTH: GOFPY), 34% of which is owned by the government, operates and manages numerical lottery and sports betting games under an estate monopoly. The company distributes its games through an exclusive and independent brick and mortar network of 5,000 agents. The business is rock solid, but let's see how its priced. With no debt and a market cap of $2 billion, OPAP will be generating $484 million of net profit in 2012 and will end up paying a 14.7% cash dividend yield.

That seems irresistible but next year OPAP will face a considerably higher tax rate. Under the new scenario, analysts expect a net profit of $103 million for 2013 and $166 million for 2014, with a 4.5% dividend yield for 2013 and 8% in 2014. OPAP would now be trading at 2013 x19 P/E and 2014 x12 P/E. It seems expensive, and it looks like the government ruined what was a spectacular play. That said, in a Euro break up scenario, valuations could go to the floor. I would keep OPAP on my watch list.

National Bank Of Greece (NYSE: NBG) reminds me of my bet on Argentina's Banco de Galicia (NASDAQ: GGAL). I bought GGAL in 2002, after Argentina broke its peg to the dollar. Banco de Galicia (currently generating a ROE 37% and trading at x1.5 P/E) was broke in the same way NBG would be if Greece decides to exit the Euro. Given its position as Greece's top bank - a position enhanced by recent merger with EuroBank, Greece's second biggest bank - NBG has huge value in an economy with few strong players.

My thesis is that, in a break up event, NBG would recover in the same way GGAL's ADR price recovered from $0.9 in 2002 to over $5 by 2004. NBG currently trades at $2 billion, still produces mark to market losses and needs capital to comply with the 10% core capital rule. Although some of the capital shortfall would be covered by the Hellenic Financial Stability Fund, the bank will need to sell regional assets and ask for more help from the central bank. The scenario is tough, but NBG is the most leveraged game you can play.

The three possibilities offered here in ascending order of risk are ways to play an Argentinean style Greek recovery if a Euro break up happens. Again, I think a break up is a remote possibility, but if it does happen it's better to be ready and know what cards you should play. Given my experience with GGAL in Argentina I would just go long on NBG and have the chance of making a real killing


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