Will Greece End up Delusional and Diluted?

by Jay Pestrichelli on May 23rd, 2012

I was talking market strategy with my co-blogger, Wayne, and the topic of Greece and the Euro came up.  At one point in the conversation we theorized what happens if the Greeks think they are able to survive off the Euro. The conversation went something like this:

“It would be a delusive exercise if they decided to go back the drachma.”
“Of course the currency would be diluted, but who in their right mind would think they could make it on their own?”
“Well yes, the currency would be diluted, but what I’m saying is they are delusional if they actually made the decision to leave the Euro”

…hence the title of today’s blog. I guess you had to be there, but it was comical enough for us to re-use it.

Greece is completely reliant on the rest of Europe to bail it out. That’s the truth. With unemployment in the 21% range and no GDP growth foreseen in 2013 they are in a downward spiral. Below are two charts with data provided by the Wall Street Journal. You should be able to see why any thought of self-sustainability is delusional.

But lets say they do make the jump to drachmas and essentially universally default on their debt. What then? They would turn on the printing presses and start shooting out money like an insane ATM to clean the slate. But even with that clean slate the fundamental economics of the country’s current condition would cause the process to repeat itself further diluting the new currency.

What does the rest of the EU think? As much as they want to, they can’t just let Greece fall off the continent and sink into the sea. There might be some tough love, but it will get very expensive for the rest of Europe to come in and help after a Greek secession.

The play on this is probably still shorting the Euro against the dollar even though the decline has already begun. In our ETF newsletter through Minyanville.com we posted a trade this morning how to do this by creating a short position in FXE and how to hedge it to protect against a reversal.


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