Yesterday, the next ‘last chance’ negotiations between Green and its creditors at the Eurogroup meeting in Luxembourg ended with no deal being reached. What does it mean for the Greek debt crisis and the gold market?

Eurozone finance ministers failed to agree a bailout deal with Greece. No agreement on Greek debt makes Greece more likely to default and exit from the Eurozone. Just as a reminder, Greece must receive the last tranche of bailout money worth €7 billion in order to make a payment of about €1.5 billion to the IMF before the end of the month. Greece has to, however, submit credible reforms prior to that.

Because negotiations have once again come unstuck over reforms to pensions, VAT and primary budget deficit targets, European Council president Donald Tusk has called an emergency Eurozone summit for Monday. As you can see, there will again be ‘final’ talks between Greece and its creditors. However, any future deal with Greece would probably have to include bailout extensions as there is no longer time to reach an agreement and agree funds by 30 June, according to the President of the Eurogroup Jeroen Dijesselbloem.

It seems that everyone is now preparing for financial turmoil and potential capital controls in Greece, as Greek banks saw deposit outflows surge to about €2 billion between Monday and Wednesday. This represents about 1.5 percent of household and corporate deposits of €133.6 billion held by Greek banks as of end-April. The Greek government is also suffering a collapse in revenue, since Greeks are delaying their payments amid fears of default.

Definitely, the default is very close now. Recently, a committee convened by the Greek parliament has claimed much of the country's debt of €320bn was illegally contracted and should not be paid, while Finnish Finance Minister Alexander Stubb said that “we have come pretty much to a dead end”.

The impact on the financial markets is highly uncertain. There are some analysts who believe that the risk of Grexit has been already priced or even that the euro would strengthen without the Greece. For sure, a Grexit could in some sense strengthen the remaining nations. However, we are afraid that such views significantly underestimate both the current and future risks involved. Specifically, the knowledge that the euro is not a binding commitment among its members will make it far less likely to work the next time. In other words, a Grexit could strengthen the Eurozone if the only problem of the Eurozone were Greece. However, the Eurozone's construction is inherently flawed – no matter whether with or without Greece. There are other peripheral countries, which are also heavily indebted, and which could then also want to leave the Eurozone. And, historically speaking, monetary unions are not stable. In the last century, Europe saw the collapse of three multi-nation currency zones, which all ended in major financial turmoil.

To sum up, the next ‘last chance’ negotiations between Green and its creditors at the Eurogroup meeting have ended with no deal being reached. This makes a Grexit, or at least Greece’s default more likely, as is reflected by accelerating deposit outflows. The debt crisis enters its final phase, which should be supportive for the gold prices.

Thank you.

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

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