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How Does Another Greek Rescue Deal Impact the euro?

Feb 07, 2012
Ron DeLegge

As international lenders ready to give Greece another massive financial band aid, the euro's performance shows no signs of crisis. Is the worst over?

“Greece has a plan.” How many times over the past three years have we heard that?

This time around, the outline for rescuing Greece consists of reducing the country’s 200 billion euros in privately owned debt. This would be achieved by bondholders accepting a 70% loss on Greek debt and swapping into a new debt structure. The deadline for the formal offer exchange to be made is February 13.

Greece’s Real Economy
Greece (NYSEArca: GREK) has already blown deficit cutting targets imposed by international lenders for this year and last year. Yet, that still hasn’t stopped lenders from caving into the Greece’s desire for more rescue money. 

Creditors want Greece to cut 15,000 state jobs this year and to eliminate 150,000 public employees over the next three years. Public employees that get to keep their jobs can expect wage cuts. How are these proposals being received by Greek workers?

The largest public and private sector unions, ADEDY and GSEE, coordinated a 24-hour strike today, which paralyzed government offices, schools, courts, and transportation services. Bank employees and dockworkers also stopped working and a strike by culture of ministry workers caused museums and other popular tourist destinations to shut down. Another 10,000 or so protestors crowded the streets of Athens as they marched to Greece’s Parliament House. Does this sound like the formula for economic healing and reform?

None of these crippling work stoppages have been included in economists’ GDP estimates for Greece, which means the estimates are wrong. And so long as the worker strikes and protests continue to interrupt Greece’s economy, attempting to accurately predicting Greece’s future GDP is a waste of time.

A Bailout Tax for Many by Few
The European Union (EU) consists of 27 European countries (NYSEArca: VGK) and was originally designed to create a strong economic alliance. Strict membership rules for entry were imposed and those rules were to be enforced. In theory, even if the rules weren’t followed, the power of many would be able to overcome the shortcomings of a few.

Going back to 2005, the EU tacitly acknowledged Greece was in violation of its economic rules, particularly in piling up too much debt. In 2009, Greece got caught manipulating its balance sheet to hide debts. Instead of penalizing Greece, it was allowed to remain a euro currency (NYSEArca: FXE) member in good standing.

Ultimately, further economic aid from other eurozone members to Greece and the other troubled countries behind it, is nothing more than a bailout tax. But unlike the traditional model for bailout taxes, which supposedly benefit the citizens of the country paying for it, the beneficiaries would be citizens in a distant country.

Will another round of bailout taxes, debt restructuring, or whatever label slick henchmen give it suddenly change the laws of nature? Will it reverse the decades of spendthrift financial management? Will it turn the tornado into a light rain shower? The ETF Profit Strategy Newsletter wisely observed:  “Whether Greece stages a disorderly default, a planned one or other financial gimmickry – it’s just a delay tactic for its final reckoning day.”

Odd Tendencies
Back in the second quarter of 2011, we saw right through the second Greek bailout package, even as it was being celebrated by political and economic leaders in the mainstream press. “Support for Greece doesn’t need much analysis because all it amounts to is a delay tactic,” is what we said to our subscribers.

Interestingly, Greece’s own citizens offer a good case study in psychotic tendencies.

On one hand, 7 in 10 Greeks favor staying in the eurozone bloc, yet those same folks passionately object to the fiscal requirements for Greece to remain within the monetary union. Put another way, they realize concessions are completely necessary, but they don’t want to make any. (Please note, these same psychotic tendencies are not limited to Greeks, but have also been observed in people from all nations.)

The European Central Bank (ECB) has repeated said that an expulsion from the euro “would be so challenging, conceptually, legally and practically, that its likelihood is close to zero.” Before you agree with them, here’s the thing to remember: Each step of the way in this debt crisis, Europe’s leaders have been wrong about nearly everything.

Trading the euro
Look ahead, the trading strategy for the euro has never been more clear. Behind Greece are Portugal and Ireland (NYSEArca: EIRL) and then Italy (NYSEArca: EWI) and Spain (NYSEArca: EWP). With or without another Greek rescue package, the euro’s future is sealed.

“Rather than forcing Greece into an orderly default, as they should, France and Germany have chosen the stubborn road of denial. And not confronting multi-billion losses tied to a Greek default right now, only means the future pain from un-payable debt liabilities will be much more severe later on,” said the ETF Profit Strategy Newsletter back in September.

ETFguide’s Profit Strategy ETF Newsletter and Weekly Picks provide an unconventional but direct strategy for investing and trading the euro crisis.

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