Greek and Eurozone officials failed to reach an agreement over Greece's debt crisis yesterday in Brussels at an emergency Eurogroup meeting. Although Jeroen Dijsselbloem, the chairman of Eurogroup finance ministers, said that seven hours of talks were “constructive”, the euro zone finance ministers were unable to agree even a joint statement on the next procedural steps. How may the Greek problems affect the gold market?
The negotiations stem from the fact that the current EU-IMF bailout for Greece expires on February 28 and a new four-year reform plan is needed. The problem is, however, that the new Greek government, led by the radical left-wing Syriza party, says the conditions of the $272 billion bailout have impoverished Greece and resists its extension and co-operation with the hated ‘troika’. The new leftist government has proposed to overhaul 30% of its bailout obligations, replacing them with a 10-point plan of reforms, including, for example, the reduction of the primary surplus target of 3 percent of GDP to 1.49 percent or getting a ‘bridge loan’ that would enable Greece to stay afloat once the current bailout deal expires and until a new program is agreed. However, Greece's creditors in the EU, led by austerity-focused Germany, have insisted that the terms of the bailout cannot be altered.
Is Greece going to default on its debt? On the one hand, Greece is currently running a primary surplus, which makes default on its debt more probable. On the other hand, the European Central Bank has recently increased pressure on Greece by banning the Greek banks from using their government’s bonds to get liquidity from the ECB. It has not yet affected Greece significantly, however the signal was clear.
Assuming that negotiations will fail and Greece will (partially) default on its debt (a Grexit seems not to be on the cards), what are the implications for the financial markets and gold investors? It seems that direct effects would not be significant, because banks or other private investors generally do not possess Greek debt anymore (only about 12%). The biggest creditors are the ECB, IMF and EU (state debts and proceeds from the European Financial Stability Fund), therefore the possible default would only affect official institutions and Eurozone states. This is why Germany opposes so strongly any alterations to the bailout program.
To sum up, the failed bailout talks will be continued on Monday, however the time to find a deal is tight and the future is uncertain. As we have already written, a Grexit is rather not probable (Greek banks would lost the cheap funds from the ECB), however some form of debt restructuring is on the horizon, especially that Greece is currently running a primary surplus. Because the debt is held mostly by official institutions, the direct impact on the gold market should not be too strong. However, prolonged negotiations or any default on debt would increase market uncertainty (for example, uncertainty about the future actions of other peripheral countries in the Eurozone) and volatility, supporting the gold price. It's unclear whether this factor alone will be enough to prevent gold from sliding further, though.
Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor
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