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What Greek Elections Now Mean
Greece cannot form a government so expect elections within a month. We
have come to the point where the bad news is out –the markets are
telling us that Greece will likely leave the Eurozone and possibly the euro
as their 10-year debt continues to trade at 27%. They may not pay out
€436 million to creditors and keep it, fearing they will not get the
next bailout tranche. Reneging on the obligation also would constitute a
default triggering derivatives contracts and clauses requiring the settlement
of other un-swapped bonds. Meantime the country has no government to make the
choice. The country may run out of money by early July. The standoff has
reignited concern that Greece will renege on pledges to cut spending as
required by the terms of its two bailouts negotiated since May 2010
This blazes the trail for Spain to follow by asking, first, for a
bailout. Portugal, Ireland, and potentially Italy are looking more and more
each day like Greece. We’re now looking at the worst possible scene.
Whether this will happen or not is not the point for investors in gold
and silver. The fact that markets are aware of this situation and are, in
fact, discounting it is much more pertinent. If the euro doesn’t
collapse and if these nations leave the Eurozone, then do not expect to see
the Eurozone fall apart but to be much stronger having jettisoned the weak
members. This would strengthen the euro enormously and send it back up
towards the €1: $1.40 area. We do not think
this is being discounted yet. The old rule that when the news is at its worst
is the historic turning point of markets. With gold and silver moving with
the euro, traders may keep the precious metals moving with the euro as it
rises. This is where we are now.
Consequences in
Greece
We have been witnessing a massive flight of capital
out of Greece, out of the banks, i.e. Soc. Gen., that are large holders of
Greek debt and even Greek money leaving to hide in the stronger
member’s banks in the Eurozone. Any exit of Greece from the Eurozone
would have to see their banks re-capitalized. Under the Maastricht Treaty,
which formed the Eurozone, any member state can impose Exchange Controls for
a short period of time while that country remains in the Eurozone. In Greece,
that could happen just to close the exits and prevent a further run on the banks.
If the government decides to switch back to the
Drachma, then expect to see the steps Argentina took when they switched from
the U.S. dollar back to the Peso. These would automatically lead to the
changing of all money, deposits and all, to Drachmas.
We would then envisage not just a two-tier currency
–one for trade and one for capital. Expect the “Commercial
Drachma” to trade at around 50% of the value of the euro and the
“Financial’ Drachma” at a 30% discount to that. While this
would stall imports, import replacement would spring to life inside Greece
and a boom would begin. Tourism would likely roar as cheap holidays drew in
huge volumes of tourists.
The central bank would impose draconian exchange
controls grabbing all the foreign funds they could. Banks would be eager to
return to Greece as they would see a sort of “scheme of
arrangement” where they could bring in loans through the
“Financial’ Drachma” and, provided the loans were given a
10-yr plus life, would be allowed to repay them through the
“Commercial’ Drachma” giving them not just huge capital
profits but a boost in their interest earnings over the life of the loan. The
resulting low cost of labor and the financial incentives to manufacturers
could see manufacturers move production there too. Such a positive outcome
for nations that follow this path is normal.
Yes, many in Greece would struggle terribly;
however, the core of their financial system would continue, and maybe even
thrive. (Note: Since 1971 the author has experience with Exchange Controls and
would be happy to consult on this
subject.)
The success or failure of a Greek exit from the
Eurozone and probably the euro would depend entirely on how the financial
side of the departure was handled.
It’s well known that Greeks love gold, and
rightly so, especially when one considers what lies ahead for them. But they
have been buying and preparing for this eventuality for the last two years.
Consequences
outside Greece
The Eurozone banking system would suffer tremendous
losses and would initially suffer the blows of lost confidence. Again,
we’re seeing this now. The overall Eurozone has entered a mild
recession that could get worse, but the same could apply to the U.S.,
travelling some distance behind, in a financial structure more capable of
weathering such storms.
The fiscal and political unity in the States is
responsible for the current strength of the dollar; however, should the
global debt situation worsen and there is a maturing of other major, U.S. problems,
then the U.S. will follow Europe; before this happens, however, the emerging
world will need to reach the point where it equals the financial world of the
developed side of the globe. The Yuan going
global would start the process.
We would have to see a rapid expansion of the money
supply in Europe as toxic national debt values shrank and needed a fresh
injection of capital to replace lost value. We’re on the brink of
another chapter of this right now. While this would undermine confidence in
the euro and the dollar, the reality that these currencies are the only
available means of exchange will continue to ensure their use and control
over the developed world.
But the loss of confidence process would result in
investors seeking to preserve the value of their wealth in gold and silver
bullion even more than we have seen in the last few years. Many times
we’ve discussed just how gold would be used to reinforce the current
currency system and how that process would become reality. More importantly,
the institutionalization of gold in an active role in the monetary system
would become a reality.
This would start in Europe, but the U.S. would
dovetail into the developments as a cautionary reinforcing of its own
monetary system too.
It may be that the public discussion over where
Germany’s gold is held will lead to public pressure on Germany to
repatriate it. If this happens, expect other nations in the develop0ed world
to follow over time, accompanied by the recognition of gold’s importance
in the reserves of a nation. This will highlight the desirability of gold in
reserves to other nations outside the developed world and an acceleration of
the demand for gold by the world’s central banks.
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