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Stock-Markets / Eurozone Debt Crisis Feb 05, 2015 - 04:12 PM GMT

By: GoldCore

Stock-Markets

  • ECB ‘blackmails’ Greece – “Grexit”, bank runs, capital controls and bail-ins likely
  • Shock announcement yesterday led to volatility in markets; turmoil in Greece
  • Stocks, commodities including oil and Greek investments fall
  • Euro gold surged from EUR 1,104 to EUR 1,126 per ounce or 2 per cent
  • Greek government bonds will not be accepted as collateral in accessing cheap ECB liquidity from February 11
  • Greek banks are believed to be heavily exposed to Greek government bonds
  • Banks in difficulty will have recourse to Emergency Liquidity Assistance (ELA) from Greek central bank but ECB has authority to block ELA
  • Greece now shut out of markets
  • ECB putting interests of banks over those of people … again

The shock ECB announcement that it is to remove vital funding to Greek banks and financial system led to volatility in markets yesterday and demand for safe haven assets – including German bunds and gold.

Euro gold surged from EUR 1,104 to EUR 1,126 per ounce or 2% in minutes after the announcement.

People Versus The Banks

The ECB manoeuvre which came 15 minutes before the end of trading in New York caused the ETF which tracks to Greek stock market to plunge 6%, led by losses in Attica Bank and Piraeus Bank SA. Greek 10-year bond yields rose to 10.8%.

Financial carnage for Greek assets continued today. Greek borrowing costs leapt and bank shares were hammered this morning after. The Athens Stock Exchange FTSE Banks Index plunged 23 percent at the open before recovering somewhat. Three-year government borrowing costs leapt more than three percentage points to nearly 20 percent, leaving Greece utterly shut out of the markets.

The ECB decision to cancel its acceptance of Greek bonds in return for funding shifts the burden onto Athens’ central bank to prop up its banks and marks a further setback for the government’s attempt to negotiate a new debt deal.

The Greek government has rightly protested the move and called the ECB’s abrupt pulling of the plug on its funding for the Greece’s already very vulnerable banking sector blackmail and an act of coercion.

Just hours following a meeting between Greek finance minister Yanis Varoufakis and ECB Chairman Mario Draghi yesterday – which Varoufakis had described as “very fruitful,” – the ECB made a pre-emptive strike on the new government of the Hellenic Republic.

Following the meeting Mr. Varoufakis described the bank bailout program as it currently functions as “fuelling a debt deflationary crisis in our nation, thus causing a major humanitarian crisis.”

He said the meeting “gives me great encouragement for the future.”

However, late in the evening at 21:36 (European central time) yesterday, the ECB suddenly announced that from next Wednesday February 11 it would no longer accept Greek government bonds as collateral used by struggling Greek banks to borrow from the ECB.

A statement from the ECB read, “The Governing Council decision is based on the fact that it is currently not possible to assume a successful conclusion of the programme review and is in line with existing Eurosystem rules.”

The Financial Times said the meeting was arranged so that Greece could get a bridging loan while Greece began to implement reforms.

In a fascinating interview with Germany’s Zeit newspaper published yesterday morning, Varoufakis put forward his reasons for insisting that the bailout system had to be reformed. He stated unequivocally:

I’m finance minister of a bankrupt country.

He explained that currently he had access to €7 billion from “ongoing European aid programs” of which he was not going to avail.

All I have to do is sign a document quickly. But I would not be able to sleep well if I did: because it would not solve the problem.

He went on to say,

That’s why we need a bridging loan. The European Central Bank should support our banks so that we can keep ourselves above water by issuing short-term government bonds.

Varoufakis seems to be of the opinion that with more time he will be able to implement economic reforms that will protect the weakest members of society and help the Greek economy get out of its current deflationary abyss.

When we talk about reforms, we should talk about cartels, about rich Greeks who hardly pay any taxes. Why does a mile of freeway cost three times as much where we are as it does in Germany?

Because we’re dealing with a system of cronyism and corruption. That’s what we have to tackle.

When asked about the possibility of taking Russia up on it’s offer of emergency funding he said,

I can give a clear answer to that: That is not up for debate. We will never ask for financial assistance in Moscow.

So Mr. Varoufakis had discussions with Mario Draghi to arrange a bridging loan which he described as being “very fruitful,” only for the ECB to ignore the Greek government’s reasonable requests and create renewed turmoil in the Greek financial system and likely an intensification of runs on Greek banks.

The timing of the move seems designed to cause discomfort to the new Greek government by causing instability and fear in the financial sector. A likely consequence is bank runs, which would put the new government under even greater pressure and could force them back into the arms of the Troika.

The first blow has been struck between the ECB and Syriza. The ECB probably hopes the move will cause the Greek government will acquiesce to the demands of the Troika.

It is a high risk move which may cause bank runs in Greece, “Grexit” and a return to the drachma and ultimately to contagion in the European banking sector.

Should the crisis escalate it is almost certain that bail-ins of deposits and the confiscation of bank deposits – will be enforced.

Irish Finance Minister Michael Noonan clearly warned, “Bail-ins are now the rule.”

Physical gold, held outside the banking system, is an absolutely essential hedge for Greeks, Europeans and indeed investors and savers globally at this time.

Get Breaking News and Updates On Markets Here

DAILY MARKET UPDATE
Today’s AM fix was USD 1,263.75, EUR 1,106.71 and GBP 828.80 per ounce.
Yesterday’s AM fix was USD 1,269.25, EUR 1,108.08 and GBP 835.31 per ounce.

Yesterday, gold gained 0.33% or $4.10 yesterday, closing at $1,265.30. Silver rose 0.46% or $0.08, closing at $17.36.


Gold in Euros – 5 Years (GoldCore)

The ECB decision to strike Greek bonds off its list of accepted collateral rattled European markets today, sending shares into reverse and investors back into safe-haven German bonds. gold benefited initially prior to also seeing price falls.

The euro tumbled after the ECB announcement and this saw gold rise 2 percent – from EUR 1,104 to EUR 1,126 per ounce in minutes. While gold rose after the ECB announcement, in Asian trading, gold in Singapore gradually moved lower and this trend continued in European trade.

As pressure on Greece’s new anti-austerity and pro-justice government ratchets up and ‘Grexit’ appears more likely, risk aversion is returning and the pan-European FTSEurofirst index dropped 0.5 percent.

Greek bank shares collapsed another 15 percent, leading a 6.5 percent decline by the Athens stock market. Yields on 3- and 5-year Greek debt climbed a very 220 and 190 basis point respectively.

Meanwhile, demand from India and China remains very robust.

Gold imports by India, the world’s second-biggest buyer, jumped in the first 10 months of this financial year as the government eased curbs on overseas purchases.

Shipments jumped to about 940 metric tons from April through January, two government officials with direct knowledge of the matter, told Bloomberg.

“Imports may be around 1,000 tons this fiscal and remain stable next year unless we see any fresh government regulations coming in,” Madhavi Mehta, an analyst at Kotak Commodity Services, told Bloomberg.

Gold in Dollars – 5 Years (GoldCore)

NATO defense ministers will meet Thursday in Brussels to discuss nuclear issues, the conflict in Ukraine and the threat of conflict with Russia.

Geopolitical risk remains high with relations between Russia and the U.S. and NATO continuing to deteriorate. The U.S. is now talking about arming Ukraine which will further inflame the situation and likely lead to an escalation in the conflict.

The very uncertain geopolitical backdrop is supportive of gold.

This update can be found on the GoldCore blog here.

Mark O'Byrne

Director

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