On Friday, Greece skipped a €300 million payment to the International Monetary Fund. What does it mean for the Hellas struggling with a crisis and for the gold market?

A lot of interesting things were happening last week in the U.S. economy, so we did not have time to write that Greece missed its Friday’s €300 million payment to the IMF.

Following a rarely used procedure permitted under IMF rules, the southern country decided to bundle its four debt payments to the IMF that fall due in June to pay them in one batch amounting to €1.6 billion at the end of the month. This means that the debt crisis entered a final phase. Indeed, it was the first time a developed country has ever missed a payment to the IMF since its creation at the end of the Second World War, while the last country to bundle together payments to the IMF was Zambia in the 1980s. It was a shock for the IMF, as just hours earlier Christine Lagarde, the IMF’s managing director, had expressed confidence that Greece would meet the Friday deadline.

Although the Greek government is essentially out of cash, it had that money, but it chose not to pay. That move looks as it was intended as a warning sign and raises suspicions that Syriza is not interested in striking a deal, since it believes that austerity has been ruinous. However, Greeks are in favor of euro membership, so the government has to keep talking and pretend that it tried everything and the default was a final resort. It would be, for sure, the best option for the country. Just to default and initiate structural reforms. Accepting the creditors’ demands will just make matters worse. We have not become a Syriza’s supporter, as it is a socialist party, which actually does not want any reforms of the pension system and labor market; however hiking the VAT tax (this is what creditors demand) during a recession is not the best idea.

This is why the Greek government rejected the proposal from its creditors as “absurd” and “unrealistic” last week, and presented its own new proposal, also dismissed. It is excellent news for the gold market, as it will raise uncertainty over Greece’s debt crisis and spur safe-haven demand for the yellow metal. Indeed, gold rose today for a third session in a row.

To sum up, the skipped Friday payment to the IMF is the sign that the crisis is escalating to a dangerous level. Both sides took tough positions in negotiations and any mistake in them can trigger a new crisis in Europe right now. Greece is still a long way from formal default and Grexit is still not the base-scenario, however, its probability has increased recently. Therefore, concerns over Grexit should support gold prices in the coming days.

Thank you.

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

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