Yesterday, after 17 hours of negotiations, Eurozone leaders have reached a deal with Greece. What does it mean for the Greek-debt crisis and the gold market?
The Greek-debt crisis reached the heights of absurdity. The Greek government accepted yesterday the harsher austerity measures than were rejected in the last referendum. In exchange, Hellas got only a promise for receiving more than €80 billion in new loans. It is pure nonsense. Greece has been already insolvent, so how it is supposed to pay an even higher debt?
But let’s look at the demands of creditors. In order to “rebuild trust”, Greece has to streamline the pension system, boost tax revenue from VAT, ensure the independence of Greece's statistics office (from whom?) and put measures in place to automatically slash spending if Greece fails to meet its targets on primary surpluses. By tomorrow. Yes, really. And by 22 July, Hellas is obliged to adopt the Code of Civil Procedure and to transpose of the Bank Recovery and Resolution Directive. Only if these measures are implemented, the creditors may start negotiations on a Memorandum of Understanding. In order to form the basis for a successful conclusion of this memorandum, the Greek government has to conduct further structural reforms in order to deregulate and liberalize its markets. On top of that, Greece has to develop a significantly scaled up privatization program and create privatization "trust" fund into which Athens will transfer some €50 billion worth of its assets, and which will be under the supervision of the relevant European Institutions.
In exchange, Greece will get short-term bridge financing to avoid bankruptcy. The amount is estimated to be €7 billion by next Monday and another €5 billion by mid-August and will be provided only if the deal on a new memorandum is reached. If the commitments are fulfill, the creditors may start negotiations on a new bailout deal from European Stability Mechanism worth more than €80 billion.
“The above-listed commitments are minimum requirements to start the negotiations with the Greek authorities” and “provided that all the necessary conditions contained in this document are fulfilled, the Eurogroup and ESM Board of Governors may, in accordance with Article 13.2 of the ESM Treaty, mandate the Institutions to negotiate a new ESM programme, if the preconditions of Article 13 of the ESM Treaty are met on the basis of the assessment referred to in Article 13.1”.
The deal is a total capitulation of Greek Prime Minister Alexix Tsipras. He failed to reach a debt relief and he accepted the sort of demands that Syriza party railed against during its successful election campaign in January and that he was opposing during a referendum.
To sum up, signing up the deal, Tsipras made a breathtaking political reversal, which can be explained only by the enormous stupidity caused by serious sunstroke, the huge bribe or blackmail. The majority of reforms will be beneficial, but hiking taxes during recession is not the brightest idea. However, there will be no debt relief, which would be the best solution (combined with structural reforms) for the Greek economy. Actually, Hellas may get the third bailout, which will only increase the debt burden. Gold futures settled lower after Greece reached a deal, which lower the probability of the Grexit. However, as the recent phase of Greek debt-crisis failed to significantly boost the gold prices, the declines should not be huge (but there may be some asymmetry here due to lack of very positive sentiment towards gold right now). And there is still a long road to a new bailout, since the deal must be approved by some members’ parliaments, including Greek parliament.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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