Tags: greece | eurozone | exit | europe

Be Prepared, Just in Case Greece Heads for the Euro Exit

Wednesday, 08 April 2015 05:58 AM Current | Bio | Archive

The IMF and the World Bank will hold their spring meetings April 17-19 in Washington, D.C.

The IMF published its twice-yearly World Economic Outlook that delivered really sobering findings on “potential” output growth. In advanced economies, that growth is expected to increase (only) slightly from current rates and to remain below pre-crisis growth rates in the medium term. In emerging-market economies, potential output growth is expected to decline further.

Investors should notice growth in advanced economies (AE) in the medium term will not return to pre-crisis levels and is at risk of “secular stagnation,” which is a condition of negligible or no economic growth in a market-based economy, while at the same time downside risk remains in emerging economies.

That’s not a perfect environment for long-term investing and as today’s global market levels don't reflect real “fundamentals,” so you should get out while you still can.

Of course, every investor must make their own decision.

Because actual markets don’t reflect fundamentals, a very good example is the eurozone sovereign bond market. Several eurozone sovereigns are offering negative yields, which means it literally costs buyers for acquiring that sovereign debt as they have to pay more than its nominal value and at maturity will be repaid at par value.

And yes, it continues getting even more interesting. The Treasury of Spain (Tesoro Público) sold 725 million euros ($786 million) in an auction with total bids of more than 3.5 billion euros of its very first -0.002 percent negative yielding six-month debt, which it calls six-month Letras.
If this is the new eurozone public finance “order” era, it probably will become even more interesting the day market participants will have to come back to earth. Think only if inflation in Germany would start coming back to its 2 percent line-in-the-sand benchmark rate, which can’t be excluded in the future.

On the risk of a coming Grexit, Greece has promised the IMF to pay back a 450 million euros ($488 million) loan, which isn't such a disproportionate big amount, but to Greece it’s big enough to leave it practically without resources to comply with other obligations it has in the next few weeks.

Greece is at tangible risk of defaulting and needs urgent financial aid that is sufficient enough for complying with its financial obligations and for which it completely depends on a “political” decision that cannot come before April 24 when the eurozone finance ministers will have their scheduled meeting and decide on the subject.

We could be on the cusp of reviving another chapter in Greece’s drama of possibly leaving the eurozone.

German Chancellor Angela Merkel has told the German daily Frankfurter Allgemeine Zeitung that she “preferred” Greece to remain in the eurozone, but noted the basis of all European efforts was built on the principle of solidarity before individual effort and responsibility.

In that statement, Mrs. Merkel made a factual 180-degree turn compared to what she said in 2012 to a small group of journalists: “… To save the euro in its entirety, Greece would have to remain in the common currency zone. There was, she said, no alternative…”

In short, I wouldn’t bet Germany will this time around take leadership for saving Greece.

If a Greek exit from the eurozone (Grexit) would occur, it is unclear how resonant a Grexit might prove to be — not only for the stability of the European Monetary Union (EMU), but also for global asset prices.

Under these circumstances I’d prefer to be prepared for a worst-case Greek scenario and protect my belongings with U.S. Treasury-cash-equivalent instruments, which are easy to acquire and cost very little to get in and get out.

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I’d prefer to be prepared for a worst case Greek scenario and protect my belongings with U.S. Treasury-cash-equivalent instruments, which are easy to acquire and cost very little to get in and get out.
greece, eurozone, exit, europe
Wednesday, 08 April 2015 05:58 AM
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