According to Reuters, Greece will not pay the €1.6 billion loan installment due today to the International Monetary Fund. What does it mean for the financial markets and the gold price?

Greece is once again at the center of market concerns, although no one knows how it will end. What we know is that talks between the Greek government and its creditors broke down over the weekend. The creditors did not agree to bailout extensions, while Greeks did not accept Troika’s demands (pension cuts, 1-percent primary budget surplus and tax hikes). Instead, Greek Prime Minister Alexis Tsipras called a referendum on the bailout deal scheduled for next Sunday.

In consequence, the European Central Bank did not increase the level of emergency aid available to Greek banks, freezing the ELA lifeline at around €89 billion. This move forced the Greek government to impose capital controls to save the banking system facing a surge in cash withdrawals. Banks will be closed at least until July 6 and the amount of money that can be withdrawn at an ATM is limited to €60 per day. Depositors cannot move money to accounts abroad, but there is no need to worry – the government assured that were fully safeguarded. If you do not believe, ask the Cypriots – they have some experience with capital controls.

There is another problem. Without a deal with creditors to unlock €7.2 billion frozen in bailout funds or at least some form of bailout extension, Greece will likely miss an IMF payment (the default probability derived from the CDM jumped to 90 percent on Monday from 71 percent in January), which is due today at midnight (Hellas will also be unable to pay back the ECB, which it owes €3.5 billion on July 20). Although technically Greece will then only be “in arrears” with the IMF, it would probably be considered the equivalent of a default. It will not automatically imply a Grexit, since there is no such legislation requiring its expulsion. However, the country will not be able to get any more funding from the IMF, and the ECB may cut the ELA funding, since it is supposed to offer support to solvent banks. So the missed payment would bring Greece closer to an exit from the Eurozone.

Greece’s default should be supportive for the gold price. It is true that the yellow metal gained only slightly on Monday, but this is due to the rising U.S. dollar. Gold was up $10 as the news hit, but as the U.S. became very expensive, the gold pared some of its gains. It is also probable that some investors are selling gold to raise cash (like after the Lehman Brothers bankruptcy when the gold price initially dropped, but eventually significantly rose), since cash is king during the initial phase of the crisis. But in the long run, after the emergency sell-offs end, the Greek turmoil should support gold prices.

Thank you.

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

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