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.
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.