Profit from the Next Greek Tragedy

Evaldo Albuquerque (January 20, 2010)

Why Greece’s Blow-up Will Smack Down the Euro and Prop Up the Buck

A sovereign debt default is one of the worst things that can happen to a country. It means that a nation can no longer afford to pay their bond investors back.

It’s a lot like declaring bankruptcy. It’s just as embarrassing. More importantly it’s a public announcement that you’re broke and can’t pay your bills.

Right now, Greece is inching closer and closer to that level of crisis.
Not everyone agrees with me. In fact, plenty of analysts believe that Greece can’t possibly default on its debt. Their rationale is that the European Central Bank (ECB) won’t let that happen.

I would rather look at this issue with a very skeptical eye. A default can go from being impossible to inevitable pretty fast. And right now, Greece isn’t that far off.

Fudging the EU Rules with Creative Accounting

According to the Euro membership, all members must keep budget deficit below 3% of gross domestic product (GDP). Greece’s budget deficit is more than fout times that limit.

And the numbers may be much uglier. As I mentioned in Monday’s article, European Union officials recently said there are “severe irregularities” in the Greece’s statistical data. That means that it’s nearly impossible to quantify Greece’s budget deficit.

To me, that makes Greece the EU’s own personal version of AIG – complete with creative accounting.

That’s a serious flaw in the EU’s sterling reputation. And the president of the European Central Bank, Trichet, has said that Greece won’t receive any special treatment on several occasions.

So if things get worse, I wouldn’t bet on a bailout.

Greece’s government has recently announced a fiscal plan to fix the problem. And the plan is a big joke to me. It promises rising GDP growth and declining deficit-to-GDP ratio at the same time.

I don’t know who they’re trying to fool, but I’m not buying it.

Given the economy’s already anemic state, starting any serious plan to fix the finances hole will only lead to further deflation, weaker economic growth, and social unrest. In other words, they will just cause more damage trying to fix their problems.

I believe Greece is just trying to avoid the inevitable: a default.

The rating agency Moody’s agrees with me. The agency said this week that Greece and Portugal may be facing a slow death as their governments are drowning in debt.

Risk of a Greek Tragedy Weights on Euro

Some believe that Greece is such a small country, that a default would not have major consequences for the rest of Europe. But a Greek default would definitely set off a domino effect through the rest of debt-ridden “PIGS.” That includes Italy, Spain, and Portugal.

All those countries would see their borrowing costs skyrocket, increasing deficit and debt levels at an even faster pace. The probability of a much more serious fiscal crisis in Europe would increase considerably.

All these problems in Europe have already taken a toll on the euro. In my mind, as Greece, and other smaller nations start to show even more problems, the euro will just continue to fall further this year.

Good News for Traders (Even in the Midst of Crisis)

The euro is considered the “anti-dollar” for a reason.

The euro is the second most traded currency on the planet after the dollar. As such, the euro tends to move in the opposite direction of the dollar. When the euro falls, the dollar tends to rise (and vice versa).

So this year, as Greece’s problems leak into the euro’s price, it will actually benefit the dollar. In fact, it’s one of several reasons I’m calling for a short-term dollar rally this year.

Remember: Any bad news for Europe is potentially good news for the dollar. Be prepared to take a couple of short-term strong dollar positions this year.

Best Regards,
Evaldo Albuquerque

EDITOR’S NOTE: Evaldo has already used the brief dollar rally this month to help his subscribers grab gains of 84% and 26% over the last two weeks. For more details on how you do the same thing, pick up a free copy of Evaldo’s latest report.

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