How a Greek farce could delight the dollar

June 1, 2011, 2:37 PM UTC

In the latest example of a world gone mad, some strategists are now making the case that buying the dollar is a can’t-miss bet.

It is time to buy the buck and sell the euro, its counterpart in the rich-world-ruination trade, says Janney Capital Markets analyst Guy LeBas. He cites the rising risk that Greece will blow up as policymakers wring their hands over how to prop up the debt-soaked state. The terms of Greece’s next bailout package are expected this month.

If something cannot go on, it will stop

Bailouts have their short-term appeal, of course. News that Germany softened its opposition to support for Greece sent the credit markets into rhapsody Tuesday, with the perceived risk of a Greek default over five years tumbling to a mere 69%.

That number remains rather high because Greece doesn’t have the money to pay off all those IOUs, of course – which is why Europe must act now to restructure Greece’s 300 billion or so euros in debts, LeBas contends.

Though the pain would be acute, the gains to be reaped in starting to dig Europe out of its chronic debt problem would be well worth it, he contends.

But the European Central Bank isn’t going along, thanks to the vulnerabilities of French and German banks. So we are left to watch the spectacle of policymakers hashing out the terms of more loans to a country that can’t pay the ones it already has – a discussion that doesn’t exactly have the ring of sound policy.

“The dogmatic refusal of the ECB to address the need for an organized restructuring is, somewhat ironically, increasing the risks of a disorganized restructuring, that is, an unstructured default,” LeBas writes in a note to clients Tuesday.

And as we saw once or twice in 2008, messing around at the edges of a debt crisis has a way of ending badly, given all the parts that can end up in the wrong place.

“Most worrying is the four-way game of brinkmanship now being played by the IMF, the ECB, Europe’s political leaders and the Greek government,” says Societe Generale analyst James Nixon. “Not only is there a significant risk that one of these players eventually drops the ball (however unintentionally), but this continues to be a very damaging process for both the single currency and the institutions involved.”

Though the euro has soared against the dollar over the past year (see chart, right) thanks to Ben Bernanke’s looser-than-thou monetary policy, LeBas believes that trend is almost certain to turn with a vengeance.

He says economic trends alone (even softer over there, if you can stand it) dictate that the euro should fall to $1.30 to $1.35 from a recent $1.44, but adds that “the structural issues imply a much larger decline than that is waiting in the wings.”

This isn’t the only trade LeBas is recommending as the euro zone tiptoes toward the abyss, mind you. He says investors should also sell European bank stocks and debt, and sell European sovereign debt except the most liquid bonds sold byFrance and Germany.

But let’s face it, not everyone was loading up on the likes of Banco Santander (STD) or stocking up on PIIGS bonds at a discount over the past few months. And for those who are simply willing to sit at the financial casino for a bit, the dollar trade clearly has the most widespread appeal.

“Given our economic and monetary policy-based assessment that the dollar has bottomed, a short EUR vs USD position has relatively limited downside risk,” LeBas writes. Of course, we shall see about that.