Greek Contagion Concerns Attract Bears to Spain, Italy: Options

By Inyoung Hwang

Photographer: Kostas Tsironis/Bloomberg

Alexis Tsipras, leader of the Syriza party, speaks to his supporters at a pre-election... Read More

Traders are buying up protection should Greece’s potential exit from the euro trigger a domino drop in Spanish and Italian stocks.
Investors are pulling out of exchange-traded funds tracking the equities, while driving up costs to hedge against declines. The price of bearish options versus bullish ones on the iShares MSCI Spain Capped ETF hit a 20-month high last week, while the cost of the contracts on the iShares MSCI Italy Capped ETF jumped 27 percent since early December, according to data compiled by Bloomberg.
Greek Prime Minister Antonis Samaras has said a victory for the Syriza opposition party in the Jan. 25 election would lead to default and an exit from the euro. Spain and Italy (FTSEMIB) are also facing the rise of anti-austerity sentiment. Things will get even worse should European Central Bank President Mario Draghi fail to devise a stimulus plan that satisfies investors, according t
o Max Breier of BMO Capital Markets Corp.
“If things go poorly in Greece, that would spell trouble for Europe as a whole, but in particular peripheral European countries that are struggling to stick with fiscal reform measures,” said Breier, a senior equity-derivatives trader at BMO in New York. “Right now things are contained, but this level of containment is largely pinned on the hope that Draghi will announce a large sovereign-bond purchase program.”

Quarterly Plunges

Both Italy’s FTSE MIB Index and Spain’s IBEX 35 Index posted their biggest quarterly declines since 2012 in the final three months of 2014, falling more than 5 percent. The gauges rose more than 1 percent at 10:11 a.m. in London today, while Greece’s ASE Index added 1.5 percent.
Options are signaling investors are bracing for further drops as anti-establishment group Podemos is rising in Spain, while Italian Prime Minister Matteo Renzi has said it’s time to focus on growth rather than austerity.
Puts on the Italy ETF outnumbered calls by 2.73-to-1, and the ratio for the Spanish fund was 1.88-to-1, data compiled by Bloomberg show. At the same time, investors have pulled money from the Italian ETF for five straight months, as the Spanish (EWP) fund saw its biggest withdrawals ever in the fourth quarter, losing $550 million.
Italian and Spanish equities have the potential to rebound after rising less than the Stoxx Europe 600 Index last year, according to Nicola Marinelli of Pentalpha Capital Ltd. European economies have strengthened since the debt crisis, and private banks and investors now have less exposure to Greek assets, he said.

Exit Recession

Italy is projected to exit a recession for the first time in four years, and Spain’s gross domestic product will pick up, economists forecast.
“Don’t sell on the weakness,” said Marinelli, who helps manage 110 million euros ($130 million) of assets at Pentalpha in London. “There’s probably going to be some kind of compromise, and Greece is less a systemic issue now than it used to be.”
Syriza, which has been leading polls, plans to seek a writedown on Greece’s debt, an option that German lawmakers have said is not on the table. But they are ready to discuss relief with Greece’s next government.
The ECB is expected to announce a quantitative-easing program on Jan. 22, three days before the Greek election. European stocks fell last week on speculation the central bank’s stimulus measures will fail to shore up the economy.
“It’s really difficult because you’ve got the next ECB meeting just before the Greek election,” said William Davies, the London-based head of global equities at Threadneedle Investments, which manages about $140 billion in assets. “If we were to see an increased likelihood of a Greek exit, equities in the euro zone would come under further pressure. Equities in Spain and Italy would come under more pressure than those from the core.”