Summary
- Possible scenarios for Greece.
- Impact on the gold market.
- What would be the look Grexit?
What are the possible scenarios for Greece and the impact on the internal market of gold? The baseline scenario is that the bailout plan will be reached in the next few days, because no one wants Grexit. Without the agreement Greece had access to external financing (such as current rescue fund, the fund euro crisis, support or emergency liquidity assistance from the IMF by the ECB) to lose, and the creditors are the probable Greek default and financial contagion from the loss of prestige of the euro. However, both sides have taken difficult positions because Syriza not disappoint its voters and not austerity believe, especially in a recession, while the creditors believe that the euro zone is in a Grexit weather. It is true that Greece and its creditors can play the game of chicken is not to play to negotiate the best deal and save face in front of their voters, but at this point, any errors in the negotiations to a new crisis in Europe and trigger the increased volatility in the currency market.
Grexit is clearly the worst case; and the likelihood is increased recently. Recently, analysts at Nomura put the probability of Grexit to 40 percent, while the forecasts of Commerzbank in Germany are even worse - 50 percent. The yield on two-year Greek bonds jumped over 250 basis points to 23.68 percent in May, while the Greek yield curve inverted, meaning investors expect a defect. As shown in Table 1, the yield on the benchmark 10-year State increased in recent months.
Figure 1: the yield on the benchmark 10-year Greek State from January 1993 to April 2015
(Click to enlarge)
What would be the look Grexit? The bailout agreement is not reached and the Greek government is separate from the international liquidity. Then the ECB suspends Greek ELA and accepts no invoices as collateral Buy limiting the ability of commercial banks to Greek government bonds and finance. Without money, the state and its insolvent banking system would default, leave the euro zone and return to the drachma (or at least, to introduce a parallel currency in the form of commercial paper - a paper that the holder is a series of receiving euro at a particular time in the future). To bank runs (which won in the past few weeks as the Greek bank deposits by € 4.6 billion to € 133.6 billion in April and the lowest level since October 2004 pace), then to avoid capital controls would be introduced.
Then Greece would shake the debt burden and could devalue its new currency of age for export competitiveness, while the banks are recapitalised in the drachma. Losing Greek depositors and citizens in general, as well as holders of Greek debt; But the Greek debt is now held primarily by official institutions (EU, ECB and IMF). Because Greece is not really in debt to the banks and other financial institutions, direct contagion will be limited because of the failure.
However, it would be significant indirect effects. A Grexit could set a precedent and encourage other countries to leave the euro zone, especially the increased risk aversion would increase interest rates on debt PIIGS countries like Portugal, Italy and Spain. Since the Greek Finance Minister, Yanis Varoufakis said: "As soon as the idea in the minds of men that the monetary union is not always, speculation begins ..." Who's next? This question is the solvent of any monetary union. Sooner or later it will start raising interest rates, the political tensions, the flight of capital. "In other words, the euro Grexit would a reputation as a strong and stable currency, falling against the dollar to destroy. The dollar appreciation would further headwind for the price of gold, but it could move on economic growth and weigh or soften the Fed tightening Given the location of the populist parties in the south could lead to political tensions Grexit .. Other Cyprus question is who could not stay in the euro zone, because the dependence of Greek banks.
No doubt there are intermediate means. For example, Greece default, always within the euro area. Really, it depends on whether Hellas is the primary surplus (according to these data, the Greek primary balance recorded a surplus of € 2.16 billion in the first four months of the year), and whether the ECB take the help of loans from the ECB emergency Greek banks. Another possibility is a settlement in Cyprus-like, in the euro zone remains the introduction of capital controls in Greece.
What are the possible effects of the above scenarios in the gold market? The Grexit should most favorable for gold prices, as it could be difficult to predict in financial and political contagion and lead therefore to increase the fears and safe haven demand for gold. According to Capital Economics, the risk of Grexit could help gold prices raise around $ 1,400 to the end of 2015. Of course, if you will really be the case depends on many other factors.
The default, without the euro zone would also risk aversion and uncertainty to increase the credibility of European debtors. Capital controls or a solution in Cyprus as well should promote the demand for safe haven gold, as it was in 2013, when the banking crisis in Cyprus led the demand for gold. In any case, the potential of higher gold prices would be limited by the appreciation of the United States. If you come to the rescue, not the support of Gold. However, a new rescue plan (without radical economic reforms) does not solve any of the problems of Greece, just buy a little time, so that support for the gold price will come later.
In short, the euro zone is a political, economic unstable project because it is a classic tragedy of the commons. His misinterpretation encouraged reckless fiscal policy in Greece, which led to the current debt crisis. As a sustainable solution is impossible without substantial reforms in Hellas, who are not likely, since the position of the socialist Syriza and the return of recession in Greece, it seems that most concerns support price Grexit gold in the future. Currently, the risk remains high. However, this may soon change.
Thank you.
Arkadiusz Sieron
The advantages of the golden sun and Monitor News Market Overview Editor
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