Much has been written on the fate of Greece and the other PIGS. It is clearly a watershed year for Greece. Jim Rogers predicted years ago that the euro would fail because of the inability of forcing member states to follow the Maastricht treaty and the inability of currencies to adjust to fiscal imprudence. The 2009 recession is the first time the self-restraint of EU member states has been tested. But, as the media often reminds us, at issue with Greece is not just the integrity of the EU and the euro, but the socio-political stability of the whole country.
At this point, one thing is certain: Greece will be bailed out. Its hard to see how Greece couldn't be bailed out. Germany has especially strong motivation for the bailout. For one, Germany is especially pro-EU and relies on a strong EU to project power. Secondly, Germany recognizes the contagion problem with Greece. European commercial banks loaded up on sovereign debt because sovereign debt counts as less risky for Basel capital ratio calculations. And third, Germany benefits from keeping weak, deficit Euro countries in the Euro because it allows Germany to run a larger current account surplus.
So, it seems another issue has been resolved. Once again, a government band-aid is stretched over a gushing wound. Markets should gradually price the uncertainty of Greece out of the market. Equities will rise, the VIX will fall, and commodity prices will recover. At least that is how it has been in the past.
But these episodes do have a lasting effect. After the Dubai scare, markets returned to normal as I described above. The only asset that didn't return to its "reinflation" trend was the US Dollar. Since the Dubai scare at the end of November, the dollar has rallied. Money naturally flows into the dollar during times of uncertainty. The fact that money stays in the dollar when the uncertainty is gone is noteworthy. Maybe the experience reminds investors what they liked about the dollar.
I think Dubai was a turning point for the carry trade that ravaged markets during 2009. Dubai clearly changed the market's perception of the recovery. The Greece situation only supports this perception. The extreme attention the market puts on contagion risk makes it very risky to be short the dollar such as the 2009 dollar-commodity carry trade. Greece and Dubai also underscore the enormous effect the recession has had on revenue generation and what this means for the demand for commodities going forward.
