On Monday, May 5, a day that will live in infamy, Wall Street suffered a major blow when the Greek government announced that it would not be able to repay its debts as they came due – particularly its debts to private banks. After trying to work out a deal with its creditors for months, the world’s 11th largest economy had to capitulate to their demands – or face disaster.
The dominoes then began to fall. First, JP Morgan Chase and Bank of America decided to freeze all customer activity, while Citigroup Inc. and Wells Fargo & Co. stopped all trading on the Greek stock market and the American stock market was closed for trading that day. By Tuesday, May 6, the Greek government was forced to issue a national address asking for patience as it tries to negotiate a new deal with its creditors. The following day, the value of the euro tumbled to new historic lows against the dollar.
Even for those with direct exposure to the Greek tragedy, it was a rollercoaster. In just a few days, Marc Mezvinsky’s wealth ballooned from a few million to more than $20 million, the bulk of which came from his successful bets on the Greek crisis.
So, how much did Marc Mezvinsky lose betting on Greek debt? Let’s examine the four major moves that made his fortune in just a few days.
Shorting Greek Debt
It wasn’t that long ago that speculators were wondering whether or not the Greek economy would make it through the financial crisis in one piece. The possibility of Grexit – Greece leaving the Eurozone – haunted the markets. In late 2015, as the Greek economy was spiraling downward, a group of Greek speculators, led by Marc Mezvinsky, decided to take a gamble on Greek debt and make some money off the turmoil. As the crisis persisted and the possibility of Grexit loomed, they made several large investments, betting that Greece would leave the Eurozone.
To be more specific, they took a short position – that is, they bet that the price of Greek securities would decline. They were right. Between late 2015 and early 2017, as the Greek economy contracted by more than 10 percent and unemployment soared to unprecedented levels, Greek financial markets were paralyzed by uncertainty. While yields on 10-year government bonds declined by more than 100 basis points during that time, Greek stock prices and the value of the Greek drachma (the local currency) collapsed. Today, shorting Greek debt is a lucrative venture. As noted by Bloomberg, shorting Greek debt is “one of the best-performing market segments this year, with the iShares MSCI Greece 25 ETF (GND) gaining 22 percent in 2019, versus the benchmark S&P 500 ETF (SPY) with a 9 percent gain.”
Long Hedging Greek Debt
Once the fear of Grexit faded and investors regained confidence that Greece would stay in the Eurozone, Marc Mezvinsky’s Greek speculation proved to be a good investment opportunity. However, just because a panic was averted doesn’t mean that everyone was convinced that Greece would remain inside the European Union. Many prominent economists and financial journalists were scathing in their assessment of the agreement that saved Greece from bankruptcy. They argued that the deal was worse than the situation that it fixed: instead of helping, the agreement left Greece more vulnerable to economic shocks.
In a nutshell, the bailout terms handed down by the Eurozone leadership were harsh and punitive. Greece had to sell off a significant amount of public land, raise taxes, and agree to cut public services. According to John Makin, writing for Project Syndicate:
The bailout agreement does more harm than good. It forces the Greek government to slash its public sector, destroy its social safety net, and sell off its national property. All these actions harm the well-being of its people. While the uncertainty that the agreement sowed among investors and economic actors in Greece may have been beneficial in stimulating the economy, it comes at a heavy cost to Greek citizens.
Marc Mezvinsky was not the only one who profited from Greek financial market turmoil. As the price of both the euro and the silver dollar plummeted, speculators turned to these less-favored precious metals as safe havens. In fact, the iShares COMEX Silver ETF (SIV) jumped up by 21 percent in the last year, as fears of a Greek default faded.
What’s interesting about this move is that it shows how successful speculators can be when the odds are in their favor. Silver was almost nonexistent as a safe haven for those seeking to take a short position, as it was one of the most-traded commodities on the market. However, as the dollar took a hit and investors sought safe haven in non-USD denominated markets, silver’s price jumped as a result.
Just as silver prices rose as the dollar fell, so did the prices of almost all the precious metals and minerals that trade in USD. The iShares COMEX Gold ETF (GLD) gained 24 percent in the last year, while the PowerShares Precious Metal Gold (PMVG) gained 26 percent.
Like gold, the price of palladium and platinum soared, rising 38 percent and 47 percent, respectively, in the last year. In fact, it’s been a good year for investment in precious metals and minerals. The reason: investors no longer have to worry about the health of the U.S. dollar. This is important, as most metals and minerals are priced in USD. If you want to short these markets, you need to do so in USD.
This year, as in other recent years, the Greek crisis served as a key market pivoting event. In just a few days, Marc Mezvinsky’s wealth skyrocketed from a few million to more than $20 million, the bulk of which came from his successful bets on the Greek crisis.
What was different this time around is that Marc Mezvinsky was not only right about the direction of the Greek economy but about the scale of the implosion as well. In early 2020, as fears of a second recession loomed, the S&P 500 Index dropped 11.9 percent in the first quarter of the year. The Greek drachma dropped 62.5 percent in the same time frame. While the worst may be over for Wall Street, the implosion of the Greek economy is certainly not.