What if Bailouts Kill the Euro?

Despite one confirmed bailout and one potential second bailout, Greece's economy remains on the ropes. Greece's debt load remains unsustainable and its government is incapable of raising enough revenue, through either services cuts or tax increases, to change its near-term or medium-term future. The situation has grown so dire that some earlier this month speculated that Greece might ditch the Euro and return to the drachma, providing the nation with more options, including devaluing and/or inflating its way out of the debt crisis. This notion was quickly shot down by Greek officials, but the rumor has sparked greater concerns about the Euro as a whole. Greece is not the only nation to face a bailout recently. Ireland and Portugal have already come seeking help. Spain has said they will not need a bailout, but there are signs in the last ten days that suggest Spain may need some Eurozone assistance. If so, the effects could be disastrous on Europe and on the Euro. While the continent will obviously survive, the currency might not. “If Spain were to collapse then the money needed to rescue it would be so much that I doubt whether the stronger European nations, Germany in particular, would be either able or willing to accumulate all of the funds,” said Nobel Prize-winning economist Christopher Pissarides. That reality may drive Spain to seek a different solution, including possibly temporarily reverting back to the peseta. Oh, my. Forget about Greece swapping to the drachma — it's almost certainly a bluff to get a second bailout package. But Spain? If the fourth-largest Euro economy drops the Euro, even temporarily, the effects on your currency trades could be enormous. You'll almost certainly want to be out of the Euro for a while. Depending on what commodity prices do to the dollar, you may want to look at USD/EUR and USD/JPY. While the first play speaks for itself, the second would rest on the notion that Japan is pretty doomed short term. Another option would be to quickly short the Euro, under the theory that any decline will be temporary. Take your profits on the bottom-side and then buy back in as the news turns. Risky, and tough to time, but worth considering if things get rough for the Euro. A third option would be to avoid the Euro all together. Investors sticking near Europe but avoiding the Euro will probably choose one side of the GBP trades, and China always lurks in the shadows.