Tags: US | Dollar | greece | crisis

Don’t Reject US Dollar as Shelter in Greek Storm

Thursday, 17 May 2012 12:14 PM Current | Bio | Archive

As an investor, I wouldn’t take lightly the Greek situation of possibly being on its way out of the eurozone that finally will depend of the results of the Greek elections on June 17.

In my opinion, it’s one of those times when it’s better to be technically prepared for the unexpected “multi-facet” chain of consequences.

It’s time to give absolute priority for preserving what you have. No more, no less.

It now has become a fact that mentioning a Greek exit from the eurozone is no longer taboo.

In this context, it’s interesting to take notice that in a prepared speech, ECB President Mario Draghi acknowledged for the very first time ever that Greece could leave the monetary union. “Let me comment briefly on the difficult situation in Greece. Since the Treaty does not foresee anything on exit, this is not a matter for the ECB to decide,” he said.

International Monetary Fund (IMF) Chief Christine Lagarde also conceded this week that Greece's exit from the single currency, which had until recently seemed implausible, would come at a severe cost.

“It is something that would be extremely expensive (IMF estimates are over 1 trillion dollars) and would pose great risks, but it is part of the options that we must technically consider,” she said.

It could be prudent to remain on alert and if a Greek exit gets under way, its impact will be hard to deal with not only in Europe but also in the U.S., as well as on a global scale.

Investors should also keep in mind that this would also lead to a sharp rise in demand for U.S. dollars.

Such a situation shouldn’t have anything to do with the fundamentals for the U.S. dollar.

I think it could be helpful to come back for a moment to the confidential IIF (Institute of International Finance) “Staff Note” dated February 18, 2012, wherein is stated: “… It is difficult to add all these contingent liabilities up with any degree of precision, although it is hard to see how they (Cost of a Greek exit) would not exceed 1 trillion euros … The global growth implications of a disorderly default are, ex ante, hard to quantify. Lehman Brothers was far smaller than Greece and its demise was supposedly well anticipated. It is very hard to be confident about how producers and consumers in the euro area and beyond will respond when such an extreme event as a disorderly sovereign default occurs…”

Speaking this week at the Washington Economic Club, World Bank President Robert Zoellick, who is stepping down from the World Bank when his term expires in June, said: “The core question will be not Greece, but Spain and Italy … If Greece decided to leave the eurozone, the ripple effects could be very damaging, reminiscent of the Lehman Brothers collapse in 2008 … Where the danger comes in is when events come and they start to affect confidence and you get illiquidity moments, and illiquidity moments start to mean something begins to tumble, whether it's companies or banks … I think the Europeans are going to need a funding match with the reform match.”

In the meantime, this backdrop is one more thing for investors, beleaguered from the ongoing euro-area crises, to worry about.

Yes, be prepared … and don't turn away from the U.S. dollar, at least not for now.

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Thursday, 17 May 2012 12:14 PM
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