What the Greek Bailout Means for the Eurozone
by Karim Rahemtulla, Advisory Panelist
Tuesday, May 4, 2010: Issue #1252
Last weekend, the European Union (EU) faced the first true public test of its backbone.
It failed.
By offering a 110-billion euro ($146.2 billion), three-year bailout package to Greece, Europe basically cashed in its chips and admitted that it would rather buckle than watch a member-nation get its just desserts.
Under terms of the deal, the EU will put in 80 billion euros, with the rest coming from the International Monetary Fund.
Of course, you can easily make the argument that the EU had no choice. After all, if Greece were allowed to default on its 300-billion euro debt (115% of its GDP, rising to 149% by 2013), it would throw the integrity of the whole union into doubt. Result: A massive attack on the euro from speculators.
So where does this put Europe now?
The Euro is Doomed… Are You in Position to Profit?
With 110 billion euros injected into its coffers, Greece might actually be able to repay its debts and keep its economy afloat.
In return for the bailout, Greece will have to continue with its austerity measures. The one that stood out to me was the harsh reality that civil servants will now face.
Wait for it…
They will no longer get an annual bonus equivalent to two months pay. Oh, the tragedy!
But there’s another harsh reality that comes from the Eurozone’s capitulation: the euro currency is doomed – and destined for the I.C.U. even more than the U.S. dollar was at one point.
Despite the stench from Europe, however, we’ve been on the right side of the euro’s woes for a while. Back in February, I recommended shorting the euro by buying LEAP put options on the CurrencyShares Euro Trust (NYSE: FXE) – the ETF that tracks the performance of the currency. I highlighted the opportunity again in March, with a “buy now; buy later” option.
My colleague, Alexander Green, has also played the situation by advising investors to take advantage of the dollar’s newfound strength – a trend that should continue against the euro, as the single currency remains under pressure. Yes, the biggest beneficiary of this mess will be the once-sad-sack greenback.
And as for the losers…
The Winner and Loser in Europe’s Fiscal and Political Mess
The biggest loser in this whole process is Germany.
The country is likely regretting the day it ever joined the euro, since it has the most fundamentally sound and most fiscally prudent economic and political structure of the bunch.
Chancellor Angela Merkel had spoken out repeatedly against a bailout package for Greece. But in the face of an all-out crisis for the currency that her country uses, she eventually backed down from her hardline stance and Germany contributed about 20 billion euros towards the bailout.
Now it will watch helplessly as Europe debases its own future, taking Germany down with it. Not only that, there’s a very real prospect of Portugal, Italy and Spain being next in line after Greece.
The big winner in Europe? France. A basket-case in its own right, France also has major structural economic and fiscal issues… except they’re not as public as the PIIGS. It will benefit from euro devaluation.
The Currency That Will Benefit From Euro Woe
Last Saturday night, I hosted a get-together for several economics professors from a local college – one of whom was from Greece.
After several hours of healthy debate, our primary conclusion was this: While the euro won’t go to zero, the fiscal crisis has shaken the foundation of the entire Eurozone and put the system in question.
Let’s face it, if we’re basing Eurozone entry on fiscal responsibility, most of us knew that Greece shouldn’t have been allowed to join the euro in the first place.
That applies to Portugal and probably Italy, too. Greece and Italy are especially known as countries that just don’t have the ability to make their citizens pay taxes. Corruption is rife at the highest levels of government, making prosecution and legislation a self-destructive action.
Our secondary conclusion: The prime beneficiary of this Greek Tragedy is the currency of a more transparent system – the dollar.
Why the Dollar Just Muscled Up… And Why it Won’t Default on its Debt
Don’t get me wrong, that’s not to say that the dollar is the world’s strongest currency. But as the world’s No. 1 reserve currency, its position is now significantly stronger, following the events in Europe last weekend.
Moreover, as Warren Buffett so eloquently stated a few days ago, the United States will never default on its foreign debt.
The reason is quite simple: When your debt is issued in your own currency, and you can print as much of it as you want, how can you default? If America owes $10 trillion, it can print $10 trillion.
Of course, the ensuing erosion of value would be a whole different story. But while the dollar can – and likely will – lose value over time to more fiscally sound currencies, the euro won’t be one of them.
Good investing,
Karim Rahemtulla
Related Investment U Articles:
- Haircuts Will Be a Long-Term Problem for the EU
- Why You Probably Don’t Want to Hold Euros in 2011
- Stability in the European Union? Not Even Close
- How to Play Uncertainties in the Eurozone
- How to Play the Collapse of the Euro
9 Responses to “What the Greek Bailout Means for the Eurozone”
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Dubbed a "market maven" by CNBC, Karim Rahemtulla is one of the country's foremost specialists in options trading. As founder and editor of The Smart Cap Alert, he focuses his efforts on all aspects of options trading – LEAPS, put selling/covered calls and spreads. 
It should be noted here as well that in bailing out Greece, they are really bailing out the banks, German, French, British, US, etc., that are holding all those Greek bonds that were at risk of default. So here, less than 20 months after we bailed everyone out through the AIG bailout and TARP and such, we are again using public moneys to keep the banks solvent and paying bonuses.
Is there any way to end this insanity?
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Ummm Mr.Rahemtulla you forgot to add the little thing about the U.S. taxpayers role in the Greece bailout through the IMF and that the U.S. funds up to 40% of the IMF.
Here’s the link
http://www.americanthinker.com/blog/2010/05/why_should_us_taxpayer_money_g.html
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Rubbish!!! these kind of …statements …are not worth more than a penny!!!
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If the USA “PRINTS” money beyond the ability or temperament of investors to purchase treasuries, can the FED sop up the excess? I think not. The dollar is doomed like all the fiat currencies. The dollar may eventually gain strength after the default only because we are the reserve currency and still will be the strongest economy when the global dust settles.
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US may never default, but that doesn’t mean the dollars they pay will be worth much. USD still best bet now as US has relatively better fundamentals than most major fx, and in forex, it’s all relative. USD least ugly of an ugly group.
Cliff Wachtel, Chief Analyst, avafx.com
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Wonder the inability of Greece and Italy to make their citizen pay their taxes and corruption in the higher echelons can be as bad as that of India. India has a tax evasion rate of more than 50% of GDP and the venality of the administrative system is a notch below an African nation. Inspite of that, we are fiscally more prudent than the PIGS.I still wonder why….I am still racking my brains. Let us face it…we do not have a social security system coming remotely near anyywhere near that of Europe. For India ….about 70 crore people do not exist, except in the abstract.
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Time is of essence for an orderly dismantling of the Euro or Europe risks social unrest with popular uprisings in Southern Europe refusing to accept perceived drastic cuts in the standard of living.
And Germany risk political turmoil when voters vent their anger for having to shoulder most of the bailout.
The worse possible policy solution is to try to save a rotten and faulty system, which will only delay the day of reckoning and help magnify the economic distortions.
Therefore all Euro members should reintroduce a national currency and make a pledge to repay all Euro debt with their new national currencies. Of course the weaker countries will need to have their Euro debt restructured and terms eased with delay of payment terms and even forgiveness for part of the principal.
It will be painful with some countries de facto having their new currencies devalued by 25% or more from the peg to the Euro when the common currency was introduced. But it is certainly better than keep trying to defend a pipe dream. At least this way the market will determine values and allowing traders to hedge currency risk when buying debt.
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“Moreover, as Warren Buffett so eloquently stated a few days ago, the United States will never default on its foreign debt.
The reason is quite simple: When your debt is issued in your own currency, and you can print as much of it as you want, how can you default? If America owes $10 trillion, it can print $10 trillion.”
I don’t see the big difference. In both cases, you won’t be able to sell new debt to foreigners unless you pay insane rates, and unless it’s denominated in a foreign currency.
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im so crazy over it….i cant understand the effects of this bailout to other stock markets..help!!!!!!!!!
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