Plenty of market commentators are all over the trouble Greece is giving the euro. Even the EU’s leadership is now openly admitting the need to prepare for Greece’s departure from the Eurozone. The strongest remaining Eurozone nations will face difficulty selling debt if they continue to insist on backstopping their deadbeat neighbors. Witness Germany’s new zero-interest bonds; investors’ tolerance for zero interest won’t last long if Germany can’t let Greece leave its cage. The EU has probably already laid contingency plans and so has the Fed, but the rest of us not in the know won’t hear about them until after they’re executed. My best guess is that the next round of EU / IMF financing will bypass Greek banks entirely and go to Spanish and Italian banks exposed to the sovereign debts of their respective countries. This is a risky bet that Greece (and maybe Portugal and Ireland) can be triaged from the euro. Future financing rounds have probably also incorporated dollar swap lines from the Fed, which of course we won’t hear about either until this next crisis is long past.
I’m not staking my own capital on any question of whether the EU can afford to let any of its southern economies leave the currency union. I’d rather focus on the effects outside Europe. Any shock to the euro from sovereign defaults and bank runs on the Continent will make the U.S. dollar look pretty dog-gone good as a reserve alternative. That sunshine will last until whatever fiscal cliff in the U.S. – from expiring tax cuts, sequestered spending, and what not – sparks a run on the dollar worldwide and a spike in U.S. short-term interest rates. The U.S. may hit its fiscal cliff in early 2013 or may muddle through for a while longer, as the Eurozone has done to my continual amazement.
I have no plans to go anywhere near U.S. stocks or bonds in anticipation of this mess. My preferred hiding places are going to be the currencies of countries with fairly low debt-to-GDP ratios, specifically Canada, Australia, and New Zealand.