Will
Greece Exit the Eurozone?
With Germany’s leaders telling us that the exit from the Eurozone by
Greece no longer holds terror for them, we understand that they are prepared for
such an eventuality. As the E.U. leader’s representatives went to Greece this week to see
the progress on the implementation of structural reforms and the austerity
measures, it became clear to all that while we must wait for the results from
them, Greece is failing in its efforts and further financing will be held beck
for now, at least. Adding to the woes in Greece, there is little agreement
within their Parliament. The Greek government is itself a broad mix of
conservatives and Socialists.
In turn, the leaders of the European Commission, the International Monetary Fund and the European Central Bank, known as the troika, are increasingly divided among themselves.
That is creating even more uncertainty as Greece and the rest of Europe head for
yet another showdown, renewing doubts about how long Athens can remain within
the Eurozone.
Greece’s lenders say they will not finance the country any further
unless it meets its goals. But many experts say that the targets were never
within reach and that pushing three increasingly weak Greek governments to
comply has only profoundly damaged the economy. The belief in many quarters
including in the Finance Ministry in Germany is that the exit of Greece from the
Eurozone is almost certain now.
Officials from the troika overseeing the Greek bailout, the
International Monetary Fund, the European Central Bank and the European
Commission in Brussels, say privately that they doubt the country will be able
to meet its official target of bringing its debt down to 120% of economic output
by 2020. Greece must make the €3.1 billion in bond payments to the central bank
on Aug. 20.
The European Commission reaffirmed that the next tranche of aid to Greece would probably not
be disbursed until September, putting the country at greater risk of running out
of money to pay salaries and pensions.
At the end of last week, the European Central Bank cut off a crucial
source of cash for Greek banks, saying that it would stop accepting Greek
government bonds as collateral for low-cost loans until the E.U. completes its
report, which is not expected until late August at the earliest. Greek banks
must now borrow from the Greek Central Bank at a higher interest rate, from a
fund with limited means; if it runs out Greece would have to start printing
drachmas.
The IMF,
which indicated in March it won’t commit more money to Greece, will make a
decision on its next disbursement in late August at the earliest based on the
troika’s findings, said two fund officials familiar with the situation in recent
days. The IMF has signalled to European officials that it will stop paying
further rescue aid to Greece, bringing the country closer to insolvency in
September. It’s “already clear” to the E.U. that Greece won’t reach the 120%
target. Missing the targets means Greece would need between €10 billion and €50
billion in additional aid, a potential outcome that the IMF is not prepared to
accept. The possibility that Greece could exit the 17- member monetary union has
been voiced this year by European officials who consider the fallout from such a
scenario would be the lesser evil against a seemingly perpetual
crisis.
Greece’s
economy shrank 3.5% in 2010 and 6.9% in 2011 and is expected to contract 7% this
year, a decline reminiscent of the Great Depression of the 1930s. Unemployment
is at 22.5% and expected to rise to 30%, while Greece’s main retailers’
association warned on Monday that sales were expected to drop 53% this
year.
Greece,
which held consecutive elections in May and June as public opposition to
spending cuts grew, risks running out of money without the disbursement of €4.2
billion due last month as the first instalment of a €31 billion
transfer.
The
statements above and the increasingly ‘anti’ stance against Greece brings its
exit to center stage. So it is sensible to look at what happens to it 111 tonnes
of gold it holds in its Gold and Foreign Exchange reserves
currently.
Where’s
Greece’s Gold?
The 111
tonnes of gold owned by Greece is in one of three central banks and perhaps
spread throughout the three. These banks are the Bank of England, the Banque de
France and the U.S. Federal Reserve. We are of the opinion [the Bank of
International Settlements would never disclose the facts] that Greece’s gold was
first used in some of the over 500 tonnes of gold/currency swaps executed two
years ago and unwound last year by the B.I.S.
We
believe, further, that these swaps were undertaken by nations finding it
difficult to raise new loans at reasonable interest rates. The gold/currency
swaps were undertaken as part of the collateral creditors required to facilitate
new loans. As such their value went far beyond the market price of the gold
involved.
When
Greece required a generous bailout from E.U. creditors we were led to believe
that part of the collateral, to be forfeited on default, was the 111 tonnes of
gold owned by Greece. It is this gold that is now in danger of being lost to the
nation now.
The fact
that it is not in the country has allowed it to be possessed by central banks
outside the country that would not hesitate to hand the gold over, on default by
Greece.
Why a
Nation’s Gold is Not Held at Home
It may
come as a surprise that the bulk of the world’s central banks do not hold their
nation’s gold in vaults at home. It has been this way for most of the last
century. While the reputations of the three central banks are impeccable,
nevertheless, with the world in the financial state it is in now, it seems a
matter of prudence that gold should not be in the possession of foreign central
banks. After all when push comes to shove, possession is nine tenths of the
law.
This
became a worry last year to Venezuela who is not the darling of the U.S. at the
moment. Its gold was held in several central banks, including the bank of
England. President Chavez, on the advice of his central bank decided to
repatriate Venezuela’s gold. It was a cumbersome exercise but it was done and is
now held in Venezuela out of the reach of those unhappy with its nationalization
policies. After all there is always a case to be made for creditors whose assets
have been seized to be given recourse to the country assets held outside the
country. This is an increasing danger in a world where the value of sovereign
debt is in doubt in so many countries.
One of
the key reasons for holding gold is to be able to sell it to provide the nation
with access to international trade and loans, when its creditworthiness and its
currency are unacceptable outside the country. By holding the gold outside the
country that gold may well have been appropriated by other nations. We have seen
of late this happen to Iran, all of whose foreign assets have been frozen with
attempts being made to freeze its oil exports. Whether justified or not, the
vulnerability of a nation’s assets should be a factor considered by the
government and central bank of every nation. To allow their assets to be
vulnerable to seizure is an act of imprudence to say the
least.
Should
Greece forfeit its gold as a consequence of its default, then it will be, we
expect, at market prices only. The ability to use its value far above its price
by way of collateral in gold swaps to facilitate loans and lower interest rates
will have been lost entirely. We believe that it is part of a central banker’s
duty to handle their nation’s assets to the full benefit of the nation. That
requires that the gold be in its own possession not in the hands of others who
may seize it because of a policy disagreement no matter how serious it may be
perceived.
If
Greece Leaves Then What Next?
Greece
will, we believe have to leave the European currency entirely, just as Argentina
did in the nineties. After all, the massive loss of creditworthiness will
necessitate a devaluation of the currency. That won’t happen by continuing to
use the euro. A glance at history shows that in this case it is possible that a
value of 50% of the Euro be attributed to the Drachma. In addition there will
have to be a block put on capital exports from Greece. After that we would
expect to see a “Financial Drachma” [ort whatever name the Greek central bank
gives it] in addition to a “Commercial Drachma” instituted in Greece as Capital
and Exchange Controls are put in place to protect what’s left of the financial
viability of Greece.
The
“Commercial Drachma” would be used for normal trade activities of import and
export of good and for tourism. The “Financial Drachma” would be for capital
flows both in and out of the country. We may well go into more detail once these
events have happened, but for now let’s leave it as a currency that could easily
fall by another 30% against the “Commercial Drachma” [say 35% of the exchange
rate value of the euro]. In another article, we may well paint the huge
advantages to Greece of operating such a system.
In
addition we may well see a system of “debt Conversion” being instituted within
Greece to incentivize investment into Greece for infrastructural development and
other projects that would benefit the nation.
