How to make money from Greece, Ireland & Portugal crisis?

Nowadays the global markets tumble on continued worries over Europes debt crisis. Markets in the United States, along with Asian and European stocks, were down sharply as investors remained overwhelmed by weak economic data, and European fiscal troubles.
Snapshot of world markets as of now

It all sparked by Portuguese debt downgrade. A week ago (Jul 5), the credit ratings agency Moody’s Investors Service downgraded Portugal’s debt to junk status and warned that there was a growing risk the country would need a second bail-out before it was ready to borrow money from financial markets again.

The agency also said it was concerned that Portugal would not be able to achieve the deficit reduction targets set out as conditions for its first bail-out from the European Union and the International Monetary Fund.

“The Portugal downgrade clearly is negative because as the downgrades spread from the weakest to the weaker, the market is now asking, ‘if Portugal is downgraded, will Spain be next?’” said Cary Leahey, an economist at Decision Economics in New York. “It’s symptomatic of the contagion effects in the eurozone.”
Cartoon depicting how other Euro members think about PIIGS (Portugal, Ireland, Italy, Greece & Spain)

Portugal was bailed out in May by other European nations, when it could no longer manage its debts. It was the third country to be bailed out, after Greece and the Irish Republic. Portugal, Greece and the Irish Republic were all given bail-out loans to give them time to repair their economies so they could borrow money normally again. Portugal got US$110 billion, Greece US$155 billion while Ireland US$126 billion, but Greece has already had to start negotiating a second bail-out.

While some have dismissed Portugal as irrelevant, investors do not take it lightly. Although it’s true that Portugal’s economy is small, even smaller than that of Greece, its public debt – and more importantly its private debt – sit on the books of nearly every major European banking institution. Portugal had around $321.8 billion worth of private and public debt held by foreign institutions, more than Greece, which had $277.9 billion, according to the Bank of International Settlements. The bulk of Portugal’s exposure is from eurozone investors to the tune of $232.6 billion. Therefore a 30% haircut on Portugal’s total debt would amount to a hit to European investors to the tune of around $70 billion.

A large chunk of Portuguese debt is held by banks and investors in France and Germany, which had direct exposures to Portuguese debt at the end of 2010 of around $27 billion and $36 billion, respectively. But that’s not all the exposure they have. Banks in those countries sold other investors insurance on Portuguese debt through credit default swaps, which would pay out if the country ever defaulted on their debt. Adding in the CDS, the net exposure to Portuguese debt jumps to $32.3 billion for France and $50.2 billion for Germany.
Will Spain and Italy be next?

With Portugal down, all concerns is focused on the next weakest Euro economies, Spain and Italy. If crisis is to hit Spain and Italy, both trillion dollar economy, it might spiral out of control. A Spanish bail-out would be a ‘real disaster’, says Otmar Issing, a founder-member of the European Central Bank, adding it would use up the entire European emergency reserves. Shall Italy falls, it may trigger another round of global financial crisis.

The downgrade of Portuguese debt and warning that Portugal may likely to default without another bailout, is expected to shake investor’s confidence and heightened worries that crisis may ‘very possibly’ spread to Spain and Italy.

With breaking news of Portuguese downgrade, I decided to play in the fear factors against these 3 weakest European economies, Greece, Ireland, and Portugal.

Spent 10 mins with my best friend Google, searching for all Greek, Irish and Portuguese stocks trading in American exchanges. There aren’t too many of them, hence pickings were fast and straightforward. I set a one-week profit goal of 20% for all of them.

The Greek company I targeted is the National Bank of Greece. Founded in 1841, it is the oldest and largest commercial banking group in Greece. The group has a particularly strong presence in Southeastern Europe and the Eastern Mediterranean and owns subsidiaries in over 18 countries. With 36,380 employees, the bank has 568 domestic banking branches and 1370 s in Greece. Being that country’s biggest, any escalated crisis would have severe negative effects on the company.

Speculating a fall in share prices, I bought in NBG Aug 11 1.5 put option at $0.25, with crisis fear in play the share indeed fell… by 15% in a week. The option now worth $0.34

Greece Play
Net profit in a week: 36%
Goal of 20%: Succeed

The Irish company I targeted is Allied Irish Bank. The AIB is a major commercial bank based in Ireland, one of the so called “big four” commercial banks in the state. The bank offers a full range of personal and corporate banking services, international banking and treasury operations.It also offers a range of general insurance products such as life, home, travel, and health insurance. In 2010, the government of Ireland took over the bank and now own 92.8%. With such great exposure to the government, a national fiscal crisis would affect the company severely.

Speculating a fall in share prices, I bought in AIB Aug 11 2 put option at $0.45, in conjunction with the global markets concerns, the share fell 17% in a week. The option now worth $0.80

Ireland Play
Net profit in a week: 77%
Goal of 20%: Succeed

The Portuguese company I targeted is Portugal Telecom. Portugal Telecom (PT) is the largest telecommunications service provider in Portugal. Although it operates mainly in Portugal and Brazil, it has also a significant presence in Guinea-Bissau, Cape Verde, Mozambique, Timor-Leste, Angola, Kenya, the People’s Republic of China, and So Tom and Prncipe. Due to its large market share, Portugal Telecom is considered a de facto monopoly in fixed telephony in Portugal. Being a representative monopoly, a national economic crisis would put it in really bad shape.

Portuguese companies do not actively trade in the US, and they did not have options! It’s quite a turn-off but I decided to give it a try. Speculating a fall in share prices, I shorted PT shares at $9.795, riding the waves, the share fell 9% in a week.

Portugal Play
Net profit in a week: 8-9%
Goal of 20%: Underperformed