Germany Waffles, Greece Hangs On The Precipice

Includes: ADRU, ERO, EU, PSQ, SEF, SH
by: Bruce Vanderveen

Can the European Central Bank, the International Monetary Fund, the US Federal reserve, the Chinese, Warren Buffet, anybody, stop a Greek default? At this point probably not. It's simply a matter of how long the illusion of solvency can be perpetrated.

A Bloomberg article claims: Germany may now be "getting ready to give up on Greece." Another one headlines "Greece Default Risk Jumps to 98%."

Without German support the end may come quickly. The recent plunge in the euro may be a harbinger of trouble on the horizon.

The European Central Bank pushes austerity on its profligate members. Austerity is counterproductive though - reducing tax revenues when they are most needed.

And then there is this: Tax evasion is a way-of-life in Greece. The country loses 15 billion euro a year in tax revenue. Green pool tiles and nets disguise swimming pools. One surgeon commented "Only the stupid pay tax." The private sector carries the burden while large public and self-employed sectors often escape unscathed.

Is it a wonder there are riots?

Everyone, if they haven't already, needs to consider what this coming default will mean to their portfolio.

So, lets look past the hand wringing and angst to see what will likely happen when the time finally arrives.

Almost Certain:

  • Greek banks go insolvent and are nationalized.
  • European banks and the ECB, heavily exposed to Greek sovereign debt, take haircuts of 50-90% on the bonds. Weaker ones go under.
  • Portugal and Ireland, next on the firing line, require substantial cash infusions (money printing) to avoid a similar fate.


  • Italy and Spain undergo “near-death” experiences. French banks, already approaching negative equity, are rocked even further.
  • Greece exits the euro. Look for a resurrected (and 50-70% devalued) "new drachma."
  • The IMF, the ECB, and possibly the US Fed and the Chinese rush in to prevent contagion (meaning save the banks) - more money printing. Gold rockets ever higher.
  • The world economy, including the US, again fall into recession.


  • A severely stressed euro does not survive in its present form. The eurozone moves to greater financial and political union.
  • Central banks print even more as the cavalry “rides to the rescue.” Commodity inflation escalates while the world economy goes into reverse.
  • Contagion in the form of a world-wide global credit crisis spreads, giving us another 2008 type event.
  • Opaque derivative markets again cause financial mistrust and mayhem (no one knows who sold those default protection CDSs!)

Investment Ramifications:

  • Unless you are an experienced trader stay away from European banks and financial institutions. Yes, bargains may develop during and after a crash, but near term risks and volatility are treacherous so just stay away. It may be best to avoid all financials.
  • Keep a healthy (50%?) cash position. If you are long, even in blue chips, hedge with low tracking error inverse ETFs such as ProShares Short SP500 (NYSEARCA:SH), ProShares Short QQQ (NYSEARCA:PSQ), or ProShares Short Financials (NYSEARCA:SEF).
  • Limit longs to blue chips and asset based equities (oil, precious metals, real estate.) They will be a defense against rampant money printing.
  • When the dust clears (this will probably take awhile) look for bargains.
  • Is there safety in short term US Treasuries and the US dollar? Maybe, at least in the short term. Keep in mind though: the US and Japan are in the same predicament – their crises just haven't come yet.

Additional Reading

See Andrew Lilico's provocative May article on a Greek default. More recent reads can be found here, and here.

Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.

Disclosure: I am long SH, SDS, SEF.