The eyes of the world have been locked on the events unfolding in Greece over the past few weeks. The government is locked out of the capital markets and struggling to come up with a credible restructuring plan that will satisfy the EU while not triggering the default covenants on sovereign debt.
The government has survived a no-confidence vote although the vote did not inspire confidence. The 155-143 vote was along party lines and in a 300 member parliament this is very close to failing.
Next up will be votes to approve austerity measures implementing 28 billion euros of cuts and new taxes and 50 billion euros in privatization revenues. These measures have provoked protests in the streets of Athens and some members of the Socialist government who voted for the government have stated that they will be voting against the austerity package unless changes are made.
The problem lies in austerity measures which only kick the proverbial can down the road, buying Greece more time to hopefully grow out of the problem.
Privatization sales will likely have a negative effect on economic growth if the new owners seek to pare expenses. If the payrolls of the companies to be privatized are similar to the Greek hospital with 40-plus gardeners and no garden then we will see additional problems.
An added danger is the possibility of the other PIIGS returning to the funding trough after Greece, who falsified reports in order to get into the euro, gets a revised bailout.
All eurozone countries must approve the bailout package for it to take effect. No doubt there will be consternation in Ireland when it comes to approving additional funds and there may be a give and take with Ireland asking for some leeway in return for a yes vote.
However, the real problem remains out of the hands of the government as a strong euro hampers efforts to boost exports which would spur economic growth.
The only way Greece will be able to come back from the brink is by kick-starting economic growth. In order to get the economy moving forward businesses will have to be more competitive via the export market which means a weaker euro.
Germany sits on the opposite side of the currency debate. The German export engine is going strong, pulling the EU forward. A depreciating euro would make German exports more attractive spurring growth and inflation which would mean more pressure for interest rate hikes. A failure to nip inflation in the bud now risks inflation becoming systemic.
A second risk would be a bank run panicking the markets sending the euro lower with gold and the dollar moving higher.
During this period of time investors would be well served to be long the U.S. dollar and gold. Gold (GLD) (DGP) is a safe haven in times of trouble and in the words of noted value investor Jean-Marie Eveillard "a protection against extreme outcomes."
The U.S. dollar will benefit from its status as a safe haven for investors as the risk off trade continues to move through the summer months.
The only worry is if the Greek and U.S. debt ceiling problems come to a head at the same time. If so, all bets may be off the table.
For the U.S. dollar, signs are pointing up and investors can take advantage of this by playing with the PowerShares DB U.S. Dollar Index Bullish (UUP) which is based on the U.S. Dollar Index or the ProShares Ultra Short Euro ETF (EUO).
When both problems resolve themselves we may see a pullback in the price of gold to the $1,425 level before once again moving higher.
Disclosure: I am long UUP, DGP.
