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Greece Debt Default and Drachma By End of April?

Economics / Eurozone Debt Crisis Apr 14, 2015 - 03:20 PM GMT

By: GoldCore

Economics

- Greek government to withhold IMF payments according to the FT
- Prime Minister Tsipras denies preparing for default according to Reuters
- Government funds to run out by end of month
- Default would likely lead to “Grexit” and return to drachma
- EU may not withstand uncertainty surrounding break-up of monetary union
- Concern could trigger derivatives crisis and ‘Lehman moment’
- Like frogs in a pot of water that is very slowly coming to the boil


1,000 Greek Drachma Note

1,000 Greek Drachma Note

The Financial Times, citing unsourced “people briefed on the radical leftist government’s thinking” has made the claim that the Tsipras government in Athens has “has decided to withhold E2.5 billion of payments due to the International Monetary Fund in May and June if no agreement is struck”.

The Greek government was quick to deny the claim. “Greece … is not preparing for any debt default and the same goes for its lenders. Negotiations are proceeding swiftly towards a mutually beneficial solution,” read a statement from the Prime Minister’s office.

The Greek government is rapidly exhausting its funding  to pay salaries and pensions with no funding from its lenders having been released since July. Another “end of the road” deadline looms – this time the Eurogroup meeting on April 24th.

This meeting may truly be the “end of the road” because it is expected that the Greek government will have finally depleted its reserves and will be wholly dependent on its creditors by the end of this month.

Negotiations have been going around in circles since the election of the anti-austerity Syriza government in January and appear no closer to resolution. It became apparent in late February that neither side was prepared to compromise – each having too much to lose from deviating from their central positions. There has been adequate time, since then, for preparations to be made for an orderly “Grexit”.

Indeed, it may be that the two sides have agreed to disagree and are waiting for a politically expedient time for Greece to leave the euro. Media coverage of the crisis in both Germany and Greece is catalysing public opinion towards this end.

Yet, both sides have a lot to lose from a “Grexit” so it is no surprise that the brinkmanship will go down to the wire.

Despite protestations and denials, borrowing from the BRICS bank is still an option for Greece – opening the way for further influence from the East into Europe.

Indeed the ties between Greece and Russia have been strengthening in recent months.

While Europe may be preparing for a “Grexit” it is hard to imagine that it could withstand the uncertainty caused by such an event. Many banks are exposed to Greek debt and a default could trigger credit default swaps (CDS) and a derivatives crisis.

Derivatives have been described by Warren Buffet as ‘financial weapons of mass destruction’. A crisis in the derivatives market would badly impact the entire western financial system and could cause contagion.

In March we wrote with regards to the fact that Deutsche Bank had not passed the Fed’s stress test, “Equally troubling, is the fact that Deutsche Bank, who have derivatives exposure of over a whopping €54 trillion – almost nine times the GDP of the entire Eurozone – has serious issues with risk management.”

Were Deutsche Bank – with its “issues with risk management” – or any highly leveraged financial institutions to be caught in the middle of a default crisis it would cause a level of financial dislocation unseen in Europe in modern times.

While a ‘Grexit’ will likely be financially and monetarily positive for Greece itself in the long term, it would be devastating in the short term.

Gold in Greek Drachma - 10 years

Gold in Greek Drachma – 10 years

This is why bank runs continue in Greece and Greeks continue to buy gold sovereigns in volume. Greeks have been accumulating physical bullion in recent months in anticipation of ‘bank holidays’, possible bail-ins and indeed a possible return to the drachma.

A reversion to the drachma would lead to high inflation during the transitionary period although medium term it would grant Greece greater export muscle with it’s weakened currency and stimulate desperately needed economic growth.

Without the support of the ECB, the country’s banking system would be shut off from international markets and likely collapse.

The overall use of the euro system liquidity assistance (ELA) to Greece came close to €90 billion ($96 billion) in early 2015. The government would have to close the banks for a week or two, print emergency currency (drachmas), strictly limit households’ access to their deposits, and introduce capital controls.

When the market opened again, the new drachma would depreciate by 30-40% before finding an equilibrium.

It is often said that major historical events first unfold so slowly that people grow complacent. Then they accelerate so rapidly that people have little time to react. Like frogs in a pot of water that is very slowly coming to the ball.

The powers that be may find a way to postpone the inevitable beyond the end of this month. Prudence would dictate that precautionary measures be taken now to protect one from the potential for a European ‘Lehman moment’ and financial dislocations in Europe and across the world.

Updates and Award Winning Research Here

MARKET UPDATE

Today’s AM LBMA Gold Price was USD 1,191.45, EUR 1,127.95 and GBP 814.33 per ounce.
Yesterday’s AM LBMA Gold Price was USD 1,197.85, EUR 1,136.72 and GBP 820.54 per ounce.

Gold in USD - 5 Years

Gold in USD – 5 Years

Gold fell 0.7 percent or $8.50 and closed at $1,199.70 an ounce on yesterday, while silver slipped 1.15 percent or $0.19 closing at $16.30 an ounce.

Gold dipped again Tuesday as a strong U.S. dollar has pressured bullion under $1,200 an ounce. Gold prices in Singapore were down 0.5 percent at $1,192.10 an ounce near the end of the day. The yellow metal reached a session low of $1,189.45, its weakest since April 1st.

The important data point and potentially the primary driver of gold prices today is US retail sales. This should give us a further read on the US economy and whether the recent poor data is a mere blip or an indication that the US economy is starting to slow down.

A positive number should see gold fall and test support at $1,180 per ounce. A negative number should see gold prices move higher and retest the $1,200 level.

Citigroup has trimmed its 2015 average gold price estimate to $1,190 from $1,220, citing “fundamental tightness being outweighed by continued U.S. dollar strength and macro investment headwinds”.

In London in late morning trading, spot gold is at $1,191.11  per ounce  or down 0.68 percent. Silver is at $16.17 per ounce or off 0.73 percent. Platinum is at $1,149.79  per ounce or down 0.28 percent.  Comex U.S. gold for June delivery fell to $1,192.20 per ounce.

This update can be found on the GoldCore blog here.

Mark O'Byrne

Director

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