The latest scheme to save the euro is actually a scheme to save its banks and their customers. It involves the central banks of various non-euro countries including the United States, Canada, Switzerland, and Japan, stepping forward to loan dollars to the European Central Bank at favorable rates so it can be reloaned to eurozone banks for use by their customers. The Chinese central bank, a major holder of euros and dollars, was notably absent.
The central bank loans to the ECB will enable eurozone banks to obtain dollars from the ECB to loan to their business clients. The loans may even give the ECB enough political cover to loan money to banks so they can buy new bonds issued by countries such as Greece, Spain, and Italy, which will then use the proceeds to refinance some of their sovereign debt that the eurozone banks hold.
But the ultimate borrowers of the money being provided, the eurozone banks, are commercial enterprises. So each is unlikely to loan money that will be used for anything other than financing their regular business clients and rolling over the sovereign debt that it now holds. The banks aren't likely, for example, going to loan money to Greece that will be used to pay off the maturing sovereign debt owned by the estate of MF Global and other U.S. hedge funds.
The eurozone banks are also not going to borrow money and use it to buy even more sovereign debt to enable Greece and the other countries to keep spending in excess of their revenues.
In other words, Greece is going to default and the action by the central banks to save the lending ability of Europe's financial institutions will not in any way stop the evolution toward a permanently stronger euro relative to the dollar that will result when there are fewer and stronger countries using the euro.
Greece and several other countries are going to go off the euro but stay in the Common Market and adopt their own currencies. In the case of the Greek it will be either a new drachma or a Greek euro.
Will this happen immediately? Investors can expect a short and volatile interim while Europe and the IMF look for money that will finance Greece and the other departing debtors "temporarily" until there is a new agreement giving someone (the common market bureaucrats? the ECB?) veto powers over the taxes and spending of its member nations. In other words until there is a United States of Europe with the euro as its currency and Germany and the Netherlands as its principal taxpayers.
Many countries, except Germany, will like the idea. The Greeks, Spain, and Italy will be enthusiastic. All this will take time so the Greeks and others will have a temporary reprieve - until either the IMF and the current rescue fund runs out of money or Germany vetos the whole idea.
When the money runs out Greece and other countries with excessive sovereign debt will be forced to drop out of the eurozone. As Greece and the others each go off the euro, the euro is going to rise in value relative to the dollar and the demand for gold and other minor currencies as a safe haven will decline.
What their departure will mean for the markets and and the holders of their sovereign debt and gold is the subject of part II of this article.