What a Greek Exit Would Look Like (FXE, FEZ, GLD, SPY, QQQ, GSG, CS)

It feels as though the market went from discussing a Greek exit as a very unlikely event to now the most likely endgame for Europe. The question is, what would a Greek exit actually look like and how would it play out? The answer can be seen in the way that the US authorities, along with other regulators, dealt with the financial crisis of 2008.

First of all, any Greek exit would be planned over a weekend, and I'm sure the leaders would be hoping for a long weekend to do it. Any plans would start on Friday night after the US markets close (early morning in Europe on Saturday) and would be rolled out quickly and definitively, with leaders having to all back every decision (any splits among leaders would make the market question the actions). Central Banks globally would ease swap lines further with banks, allowing European and Greek banks cheap access to foreign currency, so they can continue normal businesses. New Drachmas (ND's) will be printed and distributed, and Greek citizens will be required to use this currency only for certain transactions; it is likely that the country will run a two-currency system (accepting both euros and ND's until the ND stabilizes) to prevent citizens from having their savings wiped out by massive devaluations. A Troika funded bailout and backstop of the Greek banking system would be necessary to keep the Greek economy from collapsing, and the ECB would most likely reactivate the Securities Market Program (SMP) to buy up other bonds to keep yields on peripheral debt from spiking. It wouldn't be surprising if the ECB cut rates and did a third LTRO and if the Fed even went so far as to do further QE in the weeks or months after.

The costs of Greece leaving to the Greeks themselves are pretty easy to figure out. As Credit Suisse (NYSE: CS) says, "the economic equation is easy. For the Greeks, leaving now while there is a primary deficit means more austerity rather than less, in addition to the huge financial costs at the individual, corporate and financial sector level that would be associated with the immediate and large currency devaluation." Further, they say that the economic costs to the rest of Europe are vastly larger than the costs of continuing to support Greece, but due to the political nature of this debate, a Greek withdrawal from the Euro could happen anyways. The real threat, in their opinion, of a Greek exit is the Greek bank run spreading to Spain, and then to the rest of the Eurozone. Remember that European banks are far larger than the economies of the sovereigns in which they reside, whereas in the US, the government and other authorities were able to stem the bleeding because the economy was much larger than the banks.

Lastly, CS points out that it is too early to make a justified call that Greece will leave: the June elections in Greece will determine whether or not Greece remains. They say that this will not happen swiftly and would be a drawn out crisis, just like the last two years of the crisis.

So what does this mean for us? Well, if it gets drawn out and is fully priced in by the time it happens, the European stocks (NYSE: FEZ) and the euro (NYSE: FXE) should pop. Gold (NYSE: GLD) should surge higher and so should silver (NYSE: SLV) as the liquidity that will be provided by central banks will add value to the only real currency. US stocks (NYSE: SPY) (NASDAQ: QQQ) should pop on the news and commodities as a whole will follow the precious metals higher on the excess liquidity (NYSE: GSG).