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Risk of New Debt Crisis After Syriza Victory In Greece

Commodities / Gold and Silver 2015 Jan 26, 2015 - 03:33 PM GMT

By: GoldCore

Commodities

The crushing victory of the Greek opposition party Syriza in yesterday’s Greek elections has added to jitters in already jittery financial and foreign exchange markets.

The euro tumbled and gold in euros surged to its highest level since April 2013, at €1,167.94/oz as markets opened in Asia. The euro has since stablised but remains near a 11 year low against the dollar and is now down 16.7 per cent against gold in January alone.


Gold in Euros – 5 Days (Thomson Reuters)

U.S. stock index futures fell, as did European shares prior to slight recoveries while borrowing costs for the euro zone’s most indebted states rose due to increasing concerns that the Syriza party looked set to take on Greece’s international lenders after the landslide victory.

Greek markets saw worse losses. Ten-year yields rose 22 basis points to 8.99 percent, while Greece’s main stock index fell 0.6 percent, with shares in banks such as Alpha Bank and Piraeus Bank hit even more.

Yields on lower-rated euro zone bonds bounced off record lows, with Italian 10-year yields up 2 basis point at 1.54 percent and Spanish and Portuguese yields 2 bps higher at 1.39 percent and 2.26 percent, respectively.

Gold in Euros – 5 Years (Thomson Reuters)

A period of uncertainty and heightened market nervousness now seems likely and this should benefit gold.

Political uncertainty has already generated bank runs. Greek banks are already facing a serious liquidity problem as depositors have withdrawn billions of euros in recent days and weeks.  Four major Greek banks have already asked for Emergency Liquidity Assistance (ELA) from the European Central Bank (ECB).

Syriza leader Alexis Tsipras promised Greeks overnight that the five years of austerity imposed under bailout programs worth 240 billion euros from the European Union (EU) and the International Monetary Fund (IMF) were over.

Prime Minister-elect Alexis Tsipras, who pledged to renegotiate the nation’s international bailout, won 149 out of a possible 300 seats in Parliament. His mandate is now to confront the nation’s programme of austerity, imposed in return for pledges of 240 billion euros in aid since May 2010.

Syriza have been given the resounding backing of the Greek people to initiate reforms to the agreement the previous government negotiated with the Troika. His pledges include a writedown of Greek debt while persuading European creditors to keep aid flowing.

The left-wing group are just two seats short of a majority with means they should be able to form a government with sympathetic individuals or parties.

While Syriza have been careful to highlight their commitment to the EU and the Euro, there is no mistaking the hardline tone of Alexis Tsipras when it comes to dealing with the Troika of the IMF, the ECB and the European Commission (EC).

In Athens yesterday, Tsipras told the crowds “Your decision today has made the Troika a thing of the past,” according to London’s Telegraph.

“Our victory is a victory for all people in Europe who are fighting austerity. The new Greek government will be willing to collaborate and negotiate with our European counterparts for a fair solution so that Greece can emerge from the vicious circle of debt.”

Syriza appear to have every intention of keeping their election promises to cut taxes, raise public spending and increase the minimum wage. They maintain that this can be done while staying within budget by drastically cutting payments to their creditors.

Syriza’s likely finance minister to be, Yanus Varoufakis, told Channel 4, ” We are going to destroy the Greek oligarchy system.”

Exactly who Syriza define as being part of the oligarchy system is unclear as of now but it is likely that many banks and financial institutions – the beneficiaries of the current reform program – will be in Syriza’s sights.

The EU will be loathe to give any concessions that may weaken Europe’s already desperately fragile banking system. Brussels will be unwilling to sustain any such concessions lest other countries, like Ireland, demand a restructuring or write-down of their debts.

Irish Taoiseach, Enda Kenny, offered tacit support for renegotiation of the so called Greek bailout when in Davos, while also expressing hope that Greece remain within euro zone.

If Syriza is blocked from improving the conditions of Greece’s working and middle classes, it may have no alternative but to leave the Euro – a very messy and chaotic process which would lead to the end of the single currency as we know it. It would also make more likely a return to drachmas, pesetas, liras and punts.

Skillful accommodations will need to be negotiated on both sides if Greece is to remain in the Euro and the banking system is to remain intact.

Tsipras’ lack of experience and Brussels’ lack of humility may not be conducive to such accommodations.

With the ECB’s admission that the Eurozone is already in a very fragile state, it seems great uncertainty lies ahead for the international monetary system.

Gold remains an essential hedge for investors at this time and an insurance policy for depositors in the euro zone and internationally – exposed to the dual risk of bail-ins and euro devaluation.

The Comprehensive Guide to Bail-ins: Protecting Your Savings in the Coming Bail-in Era

MARKET UPDATE

Today’s AM fix was USD 1,282.75, EUR 1,141.54 and GBP 854.60 per ounce.
Friday’s AM fix was USD 1,293.50, EUR 1,150.29 and GBP 863.49 per ounce

Gold and silver both performed well last week and rose 1.43% and 3.45% respectively. Gold edged down $10.0 or 0.77% to $1,293.70 per ounce Friday and silver fell $0.08 or 0.44% to $18.30 per ounce.

Gold in U.S. Dollars – 5 Years (Thomson Reuters)

Today, gold has pulled back 1 percent as traders cashed in gains after the five month highs attained last week. The ripple felt in other markets on the Syriza’s party victory in the Greek elections may have squeezed some nervous traders into cashing in their positions.

Spot gold was down 1 percent at $1,280.10 an ounce by in early London trading. Comex U.S. gold futures for February delivery were down $8.70 at $1,283.90.

Silver was down 1.7 percent at $17.99  an ounce in London, while platinum was down 0.7 percent at $1,251.25 an ounce and palladium was down 0.8 percent at $770 an ounce.

Investor sentiment has improved somewhat recently due to safe haven demand for bullion. Bullion buyers are continuing to accumulate today viewing weakness as an opportunity.

Bullish bets on gold futures and options increased for a fourth week in the week ending January 20, while holdings of gold-backed ETFs have also increased.

A new Asian gold contract by CME Group began trading in Hong Kong on today. The 1 kilogramme (kg) physically settled contract was trading at a premium of $2-$3 an ounce over the global benchmark.

The CME contract follows new contracts trading in China and Singapore. While, liquidity has been an issue, the moves again show how the gold market is moving East and Asia becoming increasingly important to both the setting of the price and to the physical bullion market in terms of supply, demand and storage.

This update can be found on the GoldCore blog here.

Yours sincerely,
Mark O'Byrne
Exective Director

IRL
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FITZWILLIAM SQUARE
DUBLIN 2

E info@goldcore.com

UK
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LONDON 2
EC3V 3ND

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