I recently read an article in the New York Times Magazine that outlined life in modern day Greece. It detailed the hardships ordinary citizens face. How they have reverted to a barter system to meet every day needs. How they regularly drive across borders to other countries to avoid large taxes on purchases, in addition to simple tax evasion. How they have seen huge swaths of business simply vanish.
While this is life on the ground in Greece, European financial ministers continue to work toward a debt restructuring that, after a 70% write-down on private bondholders, will bring Greece’s obligations back to 129% of GDP.
It won’t matter.
The discussions in the ivory towers about debt-to-GDP ratios, private sector involvement, bank recapitalizations… none of it means a thing because none of these issues address the real problem – Greece is broke and uncompetitive.
Now, there’s a long list of reasons why this is so, but none of them matter either.
What does matter is that erasing part of the debt of a country that continues to be a net borrower doesn’t make sense. And yet, that is exactly what the various finance ministers are working to provide – more debt for a country that already can’t pay what it owes.
The Opportunity This Presents
This is about as entertaining as finance can get! Luckily, it is more than just entertaining, it is a situation that lends itself to profit.
The 17 countries that make up the euro zone all have a vested interest in keeping Greece aboard. While Greece remains, the other “sick men” of Europe, like Portugal, Italy and Spain can say, “At least we are not Greece!”
This might sound trite, but it is true.
As long as Greece is the center of negative attention, not too many people will shine a bright light on the other countries that are potentially far bigger problems.
The countries that are doing well are just as motivated to keep Greece around, but for different reasons.
Strong exporter nations like Germany have benefited from keeping laggards in the euro. It makes the currency worth a little less.
This allows Germany to sell Porsches and BMW’s, among other things, to foreign countries at a lower value. If the weak countries in the EMU were booted from the common currency, then the euro would eventually, after a time of upheaval, move up in value. This would make Germany’s exports more expensive, which would slow the economy.
The only group that benefits from Greece leaving the euro is, well, the Greek’s, who would be able to devalue their currency and regain some sort of competitive footing.
But no one cares about the Greek people, so while a default and exit from the euro will most likely happen, it will be a long, drawn out process, which leads us to the opportunity.
It’s a Win-Win for One Currency
Either Greece will default and cause turmoil, driving the euro lower until the markets stabilize, or the ECB will print more euros (the next lending operation begins today!), putting even more of the currency into the marketplace and driving down the value.
Either way the winner is clear – the U.S. dollar.
As the euro falls the U.S. dollar should gain because investors large and small will look for a safe haven. This is already evident in the ultra-low short term interest rates on Treasury bonds. But with inflation at roughly 3%, why would any investor buy a one-year Treasury bond at 0.29%? Because he can at least be sure to get his money back, even if he has to suffer through negative interest (0.29% – 3.00%) to get it!
At some point the Greek government will break its bailout agreements, just like they’ve broken every other one in the last two years. At the same time, the ECB will open the euro spigot again.
This is a great time to give the greenback another look.
Best of success,