Which Currencies Benefit on Rumors of Greece Dropping the Euro?

Includes: EU, EUO, FXB, FXF, UDN, UUP
by: The PolyCapitalist

From Germany's reliable Der Spiegel comes the predicted but potentially destabilizing late-Friday news bomb:

Sources with information about the government's actions have informed Spiegel Online that Athens is considering withdrawing from the eurozone. The common currency area's finance ministers and representatives of the European Commission are holding a secret crisis meeting in Luxembourg on Friday night.

Given the tense situation, the meeting in Luxembourg has been declared highly confidential, with only the eurozone finance ministers and senior staff members permitted to attend. Finance Minister Wolfgang Schauble of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU) and Jorg Asmussen, an influential state secretary in the Finance Ministry, are attending on Germany's behalf.

According to German Finance Ministry estimates, the currency (Drachma) could lose as much as 50% of its value, leading to a drastic increase in Greek national debt. Schauble's staff have calculated that Greece's national deficit would rise to 200% of gross domestic product after such a devaluation. "A debt restructuring would be inevitable," his experts warn in the paper. In other words: Greece would go bankrupt.

A slow motion bank run in Greece, Ireland, etc. has been taking place since this time last year. Any credible whiff of news that a eurozone member might dump the euro could trigger a panic, rapidly accelerating the move out of euros, not just in Greece but other European periphery nations, into safer currencies.

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The currencies that stand to benefit the most from this include the Swiss franc, pound sterling and the U.S. dollar.

The only way to prevent a full-on panic from unfolding would be for the Greeks, Irish, etc., to introduce draconian capital controls, which would restrict anyone holding euro assets inside Greece from transferring cash or financial assets outside the country.

On a historical note, capital controls were one of the more frequently discussed topics at last month's INET Bretton Woods conference, which featured Larry Summers, Paul Volcker, George Soros, Gordon Brown and other notables. Capital controls were a cornerstone of the original Bretton Woods/Fixed-Rate Dollar Standard era (1945-1970), a system viewed by many as a stable, effective international monetary order.

While 1945-1970 may have been the "era of financial repression," it was also the era of zero banking crises and sustained, stable economic growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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