"Firewall" Your Profits from Greece's Fiscal Drama

Greek Finance Minister Yanis Varoufakis has had a whirlwind schedule lately. On April 16 and 17 he attempted a last-ditch whirlwind "Washington Tour," meeting with U.S. President Obama, IMF boss Lagarde, ECB potentate Draghi, U.S. Treasury boss Lew, and even German Finance Minister Schäuble.

In search of sympathetic support, Varoufakis found little.

But the most intriguing meeting was with someone whose name most wouldn't recognize.

And the implications of that pow-wow could be the biggest clue of what's to come (including a "Grexit" or exit from the European monetary union), and how to prepare...

The Name That Mattered in Greece's Recent Pleas

Possibly the most significant Varoufakis tête-à-tête in mid-April was with sovereign debt lawyer Lee Buchheit.

Here's how the Financial Times describes him:

"Mr. Buchheit, a senior partner at law firm Cleary Gottlieb, is the man virtually every country in financial distress calls when a restructuring beckons. Over the past three decades his clients have included Russia, Mexico, the Philippines, Iraq, Iceland, and more recently Greece, where he orchestrated the biggest restructuring in history."

Considering how dire Greece's straits are looking these days, odds are climbing that Mr. Buchheit will count the desperate nation as a repeat client... only a few short years later.

As a clear signal of desperation, just days ago the Greek government issued a decree obliging local governments to send their cash to the nation's central bank. Some familiar with the situation expect that will raise about 2 billion euros to help meet civil servant salaries (potentially, read: IMF obligations) at month's end.

Capital controls, here we come.

But desperate times are calling for desperate measures. With a tranche of near 1 billion euros due in early May to the IMF, the Greek treasury is scrambling. Bailout agreements mean Greece owes 22.5 billion euros to creditors this year alone. The graphic below shows what their major tranches of payments look like.

Click to enlarge
Click to enlarge

And yet just 8% of the bailout money owed by Greece ever finds its way to Athens. The other 92% instead serves to bail out mostly German, French, and American banks holding Greek debt "hot potatoes."

A "Greece First" Banking Attitude Will Mean Chaos

The reaction of Greek citizens has, of course, been quite predictable. Those with enough savings to care have been buying one-way tickets for their mobile assets as withdrawals continue unabated. It's a topic I covered here back in February.

A senior Greek official recently told The Telegraph that "We are a Left-wing government. If we have to choose between a default to the IMF or a default to our own people, it is a no-brainer. We may have to go into a silent arrears process with the IMF. This will cause a furor in the markets and means that the clock will start to tick much faster."

Another source admitted, "We will shut down the banks and nationalize them, and then issue IOUs if we have to, and we all know what this means. What we will not do is become a protectorate of the EU."

UniCredit Bank AG's Erik Nielsen thinks it may only be a question of time before Athens' cash runs dry and has to resort to printing new drachmas.

Meanwhile, Athens estimates it will need 19 billion euros in the next 12 months alone, surely an overwhelming challenge for a nation now running a serious risk of being totally shut out of debt markets.

That has the ruling Syriza party grasping at arguments to help counter its obligations.

They're totaling up possible WWII reparation claims against Germany, investigating the circumstances surrounding Greece's mega bailouts and, believe it or not, gauging whether some debts should be considered "illegal" or "illegitimate" since they were taken on without citizens' consent and are not employed for their benefit.

It's getting harder by the day to see Greece and its lenders kick the proverbial can still farther down the road.

And we can't ignore the risk of contagion should Greece default, leave the euro, and resort to printing its own new currency.

But there are things you can do to create your own financial firewall.

Build a Firewall Around Your Profits

To protect your financial health, ensure you have sufficient exposure to hard assets like gold, silver, and real estate like rental property and/or raw land.

But don't ignore cash, and consider that some currencies may benefit strongly in a "Grexit" scenario.

For example, I'd expect to see first and foremost the U.S. dollar, British pound, and Swiss Franc, but also the Canadian and Australian dollars, and even the Chinese Yuan all benefit from safe haven attraction.

And thanks to ETFs, you can easily gain exposure to any and all of these currencies with but a few keystrokes in your online brokerage account.

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Here are the ETFs and their pertinent details:

  • U.S. Dollar: PowerShares DB US Dollar Bullish ETF (NYSE: UUP). As the world's reserve currency, the U.S. dollar should be part of your cash mix. This ETF has $1.34 billion in assets and trades about 2.4 million shares daily.
  • British Pound: Guggenheim CurrencyShares British ETF (NYSE: FXB). As part of the European Union but not the currency union, the pound is a natural haven for Europeans. FXB has $51 million in assets and trades 30,000 shares daily.
  • Swiss Franc: CurrencyShares Swiss Franc ETF (NYSE: FXF). Long seen as a neutral haven within Europe yet remaining outside the union, and after having dropped its peg to the Euro in January, the franc is pricier but still attractive for safety. FXF has $170 million in assets and trades about 19,000 shares daily.
  • Canadian Dollar: Guggenheim CurrencyShares Canadian Dollar ETF (NYSE: FXC). Being neighbor to the U.S. and after a considerable decline along with oil over several months, the loonie looks to have stabilized. The Canadian dollar is attractive, in part being viewed as a commodity currency. FXC has $184 million in assets and trades 82,000 shares daily.
  • Australian Dollar: Guggenheim CurrencyShares Australian ETF (NYSE: FXA). With a relatively strong economy and also viewed as a commodity currency, the Aussie dollar is attractive especially with FXA yielding over 2%. This ETF has $187 million in assets and trades 67,000 shares daily.
  • WisdomTree Chinse Yuan Strategy ETF (NYSE: CYB). As the dominant power in Asia (and way beyond) and a soft peg to the greenback, China's currency the yuan is another haven of sorts. CYB has $112 million in assets and trades 22,000 shares daily.

Don't discount the importance of cash in your portfolio, and that means seeking diversification even within this most basic of allocations.

Remember, it's impossible to know with any certainty if or when a Grexit will happen. But based on the reaction of locals, and Varoufakis' consulting with sovereign debt lawyer Buchheit, worries are running high.

Cash may be king again soon.