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Eurozone In Crisis

Written By Brian Hicks

Posted April 7, 2015

The Euro Is Going Down

Ray Dalio, manager of the world’s largest hedge fund crushed last quarter by betting against the euro. His fund, Bridgewater Associates, rose about 14% in the year to date.

Most of the return was fueled by shorts on the troubled euro. Despite the fund’s success, I maintain that investing in hedge funds is dangerous and you’re better off, say 9:1, in indexes as hedge funds rarely pay off like this.

But if you have the stomach for it (and the capital), the European Central Bank’s loss can be your gain just as it was for Dalio and his investors. But I reckon his fees are going to skyrocket on the strength of the good news.

Including the recent gains, the fund has grown to $165 billion and attributes its growth to “the lack of aggressive policy action by the ECB… stagnation and depression across much of the Eurozone.”

Other firms that placed comparable bets on foreign currencies, bonds, and stocks saw similar windfalls after governing actors initiated major swings.

The euro fell 11% against the dollar in this year’s first quarter, all while the ECB prepared to increase stimulus and the Federal Reserve announced that it would raise interest rates.

Running Out Of Time

Speaking of the euro, Greece has two weeks to pull a lot of them out of its hat.

The possibility of a default has been postponed for now with the confirmation from Greece’s finance minister, Yanis Varoufakis, that the country would meet Thursday’s deadline for a €448 million payment to the International Monetary Fund.

However, with more deadlines quickly approaching, the threat of bankruptcy could return as soon as the end of April if Greece is unable to find a more permanent solution to its financial woes.

If it doesn’t, Greece might lose the faith of its current creditors which would put the nation in a tighter spot than it’s currently in and could result in a default even sooner.

Regardless of what option Greece chooses, drastic action needs to be taken soon:

At this point, anything not tied down has already been put to use and the past two-and-a-half months could have been better spent rather than painting a divided front for backers and not taking concrete steps in any direction.

Greece’s creditors are waiting to see some meaningful action before either continuing to lend Greece money or refusing to do so.

Unless Prime Minister Alexis Tsipras is willing to declare bankruptcy, austere capital controls must be enforced and Greece will be expected to leave the euro.

Desperate Measures

In the meantime, Greece has resorted to demanding that Germany pay it €279 billion as a repayment for what Greece was forced to give the Nazi regime during World War II.

Greece has long made claims to this WWII debt but has only just now, for the first time, put an exact figure on the amount.

Germany maintains that the issue was long resolved and that it isn’t taking the renewed claim seriously.

If Germany was to concede to Greece’s demands, Greece’s current economy of €223 billion would more than double while Germany’s would only shrink by about one-tenth.

If Greece saw fit to wait this long before seriously demanding reparations from Germany, then anything else it says should be taken with a grain of salt.

Granted, the country has been in trouble for some time now and that trouble has perhaps finally come to a head, but issuing these claims with an air of sincerity won’t solve anything in the long run.