Greek and Eurozone officials failed to reach an agreement over Greece's
debt crisis yesterday in Brussels at an emergency Eurogroup meeting. Although
Jeroen Dijsselbloem, the chairman of Eurogroup finance ministers, said that
seven hours of talks were “constructive”, the euro zone finance ministers
were unable to agree even a joint statement on the next procedural steps. How
may the Greek problems affect the gold market?
The negotiations stem from the fact that the current EU-IMF bailout for
Greece expires on February 28 and a new four-year reform plan is needed. The
problem is, however, that the new Greek government, led by the radical
left-wing Syriza party, says the conditions of the $272 billion bailout have
impoverished Greece and resists its extension and co-operation with the hated
‘troika’. The new leftist government has proposed to overhaul 30% of its
bailout obligations, replacing them with a 10-point plan of reforms,
including, for example, the reduction of the primary surplus target of 3
percent of GDP to 1.49 percent or getting a ‘bridge loan’ that would enable
Greece to stay afloat once the current bailout deal expires and until a new
program is agreed. However, Greece's creditors in the EU, led by
austerity-focused Germany, have insisted that the terms of the bailout cannot
be altered.
Is Greece going to default on its debt? On the one hand, Greece is
currently running a primary surplus, which makes default on its debt more
probable. On the other hand, the European Central Bank has recently increased
pressure on Greece by banning the Greek banks from using their government’s
bonds to get liquidity from the ECB. It has not yet affected Greece significantly,
however the signal was clear.
Assuming that negotiations will fail and Greece will (partially) default
on its debt (a Grexit seems not to be on the cards), what are the
implications for the financial markets and gold investors? It seems
that direct effects would not be significant, because banks or other private
investors generally do not possess Greek debt anymore (only about 12%).
The biggest creditors are the ECB, IMF and EU (state debts and proceeds from
the European Financial Stability Fund), therefore the possible default would
only affect official institutions and Eurozone states. This is why Germany
opposes so strongly any alterations to the bailout program.
To sum up, the failed bailout talks will be continued on Monday, however
the time to find a deal is tight and the future is uncertain. As we
have already written, a Grexit is rather not probable (Greek banks would
lost the cheap funds from the ECB), however some form of debt restructuring
is on the horizon, especially that Greece is currently running a
primary surplus. Because the debt is held mostly by official
institutions, the direct impact on the gold market should not be too
strong. However, prolonged negotiations or any default on debt would increase
market uncertainty (for example, uncertainty about the future
actions of other peripheral countries in the Eurozone) and volatility, supporting
the gold price. It's unclear whether this factor alone will be
enough to prevent gold from sliding further, though.
Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor
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