Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
The Bad News About Record-Low Unemployment - 24th June 19
Stock Market New High, but…! - 24th June 19
Formula for when the Great Stock Market Rally Ends - 24th June 19
How To Time Market Tops and Bottoms - 24th June 19
5 basic tips to help mitigate the vulnerability inherent in email communications - 24th June 19
Will Google AI Kill Us? Man vs Machine Intelligence - 24th June 19
Why are Central Banks Buying Gold and Dumping Dollars? - 23rd June 19
Financial Sector Paints A Clear Picture For Stock Market Trading Profits - 23rd June 19
What You Should Look While Choosing Online Casino - 23rd June 19
INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - 22nd June 19
Here’s Why You Should Drive a Piece of Crap Car - 22nd June 19
How Do Stock Prices React to Fed Interest Rate Cuts? - 22nd June 19
Gold Bull Market Breaking Out! - 21st June 19
Post-FOMC Commentary: Delusions of Grandeur - 21st June 19
Gold Scores Gains as Draghi and Powel Grow Concerned - 21st June 19
Potential Upside Targets for Gold Stocks - 21st June 19
Gold Price Trend Forcast to End September 2019 - 21st June 19
The Gold (and Silver) Volcano Is Ready to Erupt - 21st June 19
Fed Leaves Rates Unchanged – Gold & Stocks Rally/Dollar Falls - 21st June 19
Silver Medium-Term Trend Analysis - 20th June 19
Gold Mining Stocks Waiting on This Chart - 20th June 19
A Key Gold Bull Market Signal - 20th June 19
Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - 20th June 19
Investing in APPLE (AAPL) to Profit From AI Machine Learning Stocks - 20th June 19
Small Cap Stocks May Lead A Market Rally - 20th June 19 -
Interest Rates Square Minus Zero - 20th June 19
Advice for Financing a Luxury Vehicle - 20th June 19
Stock Market Final Blow Off Top Just Hit… Next Week Comes the FIREWORKS - 20th June 19
US Dollar Rallies Off Support But Is This A Top Or Bottom? - 19th June 19
Most Income Investors Are Picking Up Nickels in Front of a Steamroller - 19th June 19
Is the Stock Market’s Volatility About to Spike? - 19th June 19
Facebook's Libra Crypto currency vs Bitcoin: Five Key Differences - 19th June 19
Fed May Trigger Wild Swing In Stock Index and Precious Metals - 19th June 19
How Long Do Land Rover Discovery Sport Brake Pads Last? - 19th June 19
Gold Golden 'Moment of Truth' Is Upon Us: $1,400-Plus or Not? - 18th June 19
Exceptional Times for Gold Warrant Special Attention - 18th June 19
The Stock Market Has Gone Nowhere and Volume is Low. What’s Next - 18th June 19
Silver Long-Term Trend Analysis - 18th June 19
IBM - Watson Deep Learning - AI Stocks Investing - Video - 18th June 19
Investors are Confident, Bullish and Buying Stocks, but… - 18th June 19
Gold and Silver Reversals – Impossible Not to Notice - 18th June 19
S&P 500 Stuck at 2,900, Still No Clear Direction - 17th June 19
Is Boris set to be the next Conservation leader? - 17th June 19
Clock’s Ticking on Your Chance to Profit from the Yield Curve Inversion - 17th June 19
Stock Market Rally Faltering? - 17th June 19
Johnson Vs Gove Tory Leadership Contest Grudge Match Betfair Betting - 17th June 19
Nasdaq Stock Index Prediction System Is Telling Us A Very Different Story - 17th June 19
King Dollar Rides Higher Creating Pressures On Foreign Economies - 17th June 19
Land Rover Discovery Sport Tailgate Not Working Problems Fix (70) - 17th June 19
Stock Market Outlook: is the S&P today just like 2007 or 2016? - 17th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

Greece’s Current Debt Problems

Interest-Rates / Eurozone Debt Crisis Jun 06, 2015 - 10:50 AM GMT

By: Arkadiusz_Sieron

Interest-Rates Greece is again on the brink. Hellas stood on the edge for the first time in spring 2010. In May 2010 the European Union and International Monetary Fund approved the first bailout worth €110 billion, under the condition of austerity measures. The first rescue package missed its targets as lenders’ economic forecasts for Greece were too optimistic. Therefore, in February 2012 the Troika (the Eurogroup, the European Central Bank and the International Monetary Fund) finalized the second rescue package worth a €173 billion (including money left over from the first bailout) provided by the newly created European Financial Stability Facility.


The agreement implied austerity measures and included the extension of the repayment period to 15 years, the lowering of the interest rate to 3.5 percent and a 53.5 percent haircut accepted by the private bondholders. The write-down was applied to €198 billion of Greek bonds, making it the biggest debt default in history.

            The last part of the Greek tragedy began when Syriza won the general election in January 2015. This radical-left party wanted to challenge the logic of the bailout deal and opposed an extension of the bailout program that ended February 28. Eventually, the bailout program for Greece was extended – in return for Greece’s commitment to honor its debt obligations and conduct structural reforms –within four months (the end of June), just weeks before Greece’s due date to make several large debt repayments.

            What are the current economic difficulties of Greece? The main problem is quite simple: Greece does not have enough income to pay its bills. Hellas has to pay off over €1.5 billion to the IMF in June and €7 billion to the ECB to repay government bonds (including interest), which mature in July and August. It does not mean that the country will immediately default without unblocking the last €7.2 billion tranche of the current bailout program. Greece managed to improve its budget in the first quarter of 2015. However, according to Silvia Merler, the improvement was achieved mainly by “postponing payments to suppliers (e.g., to the hospitals – note ours) which can be efficient in improving the budget in the short term, but the postponement of state payments to suppliers may hurt the real economy even further”. Indeed, Greece’s economy fell into recession again in the first quarter as its GDP contracted by 0.2 percent, after shrinking 0.4 percent in the previous period. Moreover, to make the last payment to the IMF, Greece had to use its special drawing rights (held at the IMF) and to borrow money from different parts of the state administration, public enterprises and pension funds. Thus, it seems likely that the government will struggle to make payments twice as large. Economists believe that Hellas will probably survive until July 20, when it has to make the €3.5 billion payment to the ECB. According to Peter Spiegel, Greece needs a third bailout of as much as €37.8 billion.

            The public finances are not the only problem. The Greek banks are facing bad loans, deposit outflows and are running out of the collateral they need to survive. And the Hellas’ bad financial situation is aggravated by the debt servicing costs. Greece’s debt is the highest in the Eurozone and it will reach 180.2 percent of the GDP this year (see the chart 1).

Chart 1: Greece’s general government gross debt to GDP (in %) between 2011 and 2015

However, contrary to popular opinion, the debt-servicing burden is not excessive, compared to other countries and historical cases. This is because creditors lowered interest rates and extended loan maturities (the average maturity of Greece’s debt is now 16.5 years, double that of Germany and Italy). Interest payments fell from 7.3 percent of GDP in 2011 to 4.3 percent of GDP in 2014 (and subtracting interest payments refunded and deferred, Greece already has to pay only 2.6 percent), similar to 4.4 percent in the case of Ireland in 2013, 4.8 percent in the case of Italy and 5 percent in case of Portugal. Therefore, Greece pays less than the countries with much lower debt-to GDP ratios; however the payments falling due this year are the real issue.

The truth is that the Greek government is simply not willing to repay the debt in full, especially with an economy that is falling into recession. It could do it, for example, by selling its assets, by deregulating and liberalizing its economy to revive totally uncompetitive exports(Greece is the least competitive economy in the Eurozone), or by reforming its pension system, which costs 17.5 percent of the GDP, while the average pension expenditures in the Eurozone amount to the 13.8 percent of the GDP. However, it won’t, just because it believes that Greece has been a victim of excessive austerity.

To sum up, the Greek government will struggle to make payments which fall due in July and August. It seems unlikely that Hellas will manage to repay its summer debt obligations without the agreement of its creditors or a significant drag on its real economy (in the form of default on obligations against its suppliers and employees). However, even a new rescue package will not help, because Greece – as the last Soviet-style economy in Europe – is a bottle without a bottom. Therefore, a sustainable solution is not possible without substantial reforms in Greece.

Thus, it seems that in the nearest future Greece’s debt crisis will be a supportive factor for gold prices. Fears over Greece should increase in the coming days, so then the gold prices, as the yellow metal will be bought as a safe haven or a hedge against the financial turmoil that could follow a Greek default. This was the case in 2010, when the Greek crisis led to safe-haven buying and supported gold prices, and also in 2012, when the gold price peaked around the time that Grexit fears were at their highest (see the chart no. 2). On the other hand, if fears diminish– for example, because the new bailout package will eventually be finalized–gold prices will probably decrease.

Chart 2: Gold prices in USD (green line) and EUR (red line) between May 2005 and April 2015 with selected periods of highest Grexit fears.

If you enjoyed the above analysis, we invite you to read the full version of this report - in our June Market Overview report we analyzed the relationship between Hellas’ problems and the gold market, as well as possible scenarios for the Greece’s crisis. We also encourage you to stay updated on the latest gold-related global developments by joining our gold newsletter. It's free and you can unsubscribe anytime.

Thank you.

Arkadiusz Sieron

Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules