We are coming back to Greece, as Greek share prices of Greek banks have tumbled and government bond yields have surged to record highs on growing fears over the Greek economy. Will Greece default and what will it mean for the gold market?
Greece is running out of cash. Yes, it has been running out of money for at last a few years, but now it is really serious. The country has to pay about €12.3 billion in the next five months. The government is so desperate that it seized public-sector funds to keep Greece afloat. To be more precise, the central government ordered local governments to move their reserves held in commercial banks to the central bank. It reflects the dire liquidity situation. And the capital outflows are not helping. In March, €5.27 billion flew away from Greece, according to the data from the Bank of Greece. The outflow of deposits forced Greek banks to borrow 4.4 percent more (€68.81 billion overall) from the so-called Emergency Liquidity Assistance (ELA) in March. The Greek banks have lost almost €27 billion since October 2014.
The financial markets are getting increasingly jittery over the current situation as Greece’s three-year yield hit a record high of 28 percent (the Greek 10-year yields also rose to their highest level since late 2012 at 13.1 percent), while shares of domestic banks fell to an all-time low after the news that the ECB was considering increasing the ‘haircut’ on its ELA lending for Greek banks. It means that the value of these stocks has halved since the beginning of this year.
The current state of affairs makes more investors and policy makers convinced that Greece will not remain in the Eurozone. Undoubtedly, no one wants a Grexit, however it is becoming more probable, because of the ECB’s belief that a Grexit will not cause contagion (it will). Maybe it is only a political game, but credit-default swaps suggest that there is about an 81 percent chance of Greece being unable to repay its debt in five years, compared with about 67 percent at the beginning of March.
The rising uncertainty about Greece should increase the safe-haven demand for gold and support its prices. The coming days should be very hot and we will definitely hear more about Greece. On Friday, a Eurogroup meeting is scheduled in Riga, Latvia, where the Greek government should present the final list of economic reforms. However, according to certain officials, Greece will not manage to do it. As we remember, the agreement on a list of comprehensive economic reforms is necessary to get €7.2 billion from its bailout fund. Without this money, the May €1.1 billion payment to creditors would be at stake.
Summing up, the Greek problems are deepening. The central government is running out of cash and the financial system suffers from capital outflows and rising yields on bonds. Although Greeks and their creditors may just play a game in order to please their voters (we have seen this many times when Republicans and Democrats fought over the federal budget), the risk of political miscalculation is rising. Play or no play, the reality is that Greece is an effective bankrupt and its debts are not payable. This is good news for gold prices, because the concerns over Greece will increase the safe-haven demand for the yellow metal.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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