As expected, Greece missed its payment to the IMF. What does it mean for Greece and the gold market?

Greece became the first advanced economy to fail to repay a loan to the IMF in its 71-year history and is now formally in arrears. It is a significant step toward a complete bankruptcy and a possible exit from the Eurozone. Hellas will no longer be able to access IMF financing (until it pays its debt) and may eventually be expelled from the organization.

The most important consequence is, however, that missed payments to the IMF trigger clauses that allow other holders of Greek government bonds to demand speedier repayment and in turn increases the likelihood of Greece defaulting on its other debts. This is because the terms of the bail-out program stipulate that a default to the IMF would automatically constitute a default on the European Financial Stability Facility (pp. 32-34). However, European creditors have the right – not the obligation – to accelerate EFSF loans, causing them to be immediately payable. Such acceleration could in turn trigger a cross-default and possible acceleration in other Greek government bonds held by private investors and the ECB.

Everything seems to depend on the ECB now. The IMF is an international organization composed of 188 countries, which is not able to penalize Greece (at least officially). And the IMF’s procedure after missed payments is quite long, complicated and does not have to imply immediate repercussions. According to the IMF protocol (p. 139), Christine Lagarde, managing director of the IMF, has one month to notify the executive board of the late payment, which effectively means a possible 30-day grace period.

Therefore, the possible default on the €3.5 billion worth of debt due to the ECB on July 20 could have more serious consequences. This is because the ECB may then cut the ELA financing (if it decides that Greek banks are insolvent and do not possess adequate collateral). Such a default would also be more politically unpleasant, since the losses would have to be covered directly and solely by the Eurozone members (not by the IMF members with the leading role of the U.S.).

This may be the reason why gold has found little support from haven bids. Investors seem to think that creditors could strike a last-minute deal or believe that Greece is no longer systemically important (as it owes money mainly to public institutions, not private investors). The U.S. dollar, Thursday non-farm payroll report and the expected Fed’s interest hike seem to be more important forces in the gold market. However, investors should remember that markets often do not price in all the implications of what is happening and major crises are often precipitated by seemingly small events that expose underlying weaknesses in global finances.

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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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