Greek Debt Crisis Coming To Head - “Second Currency” For Greece and Contagion?

Greek Debt Crisis Coming To Head – “Second Currency” For Greece and Contagion?

- Greece Rapidly Running Out Of Cash – Soon Must Fold To Troika Or Default
- IMF Rebuff Greek Suggestion To Delay Repayments
- ECB’s Draghi Warns Potential “Grexit” Puts EU In “Uncharted Waters”
- Despite Threats, Greece Remains Defiant, Won’t “Budge On Red Lines”
- ECB Considering A “Second Currency” For Greece

The Greek government and its “partners” appear to be reaching the end of the road in their negotiations to release the final €7.2 billion of its €240 billion bailout deal.

Eurozone countries are demanding that the new Greek government produce a list of reforms that prove its credibility before releasing euros to them. However, Finance Minister Varoufakis is suggesting that Greece will not retreat from its red lines and did not rule out a referendum or early polls if talks remain deadlocked.

Greece is rapidly running out of cash with which to pay public sector wages, pensions and welfare payments. At the same time Greece is expected to pay €930 million which is due over the next few weeks.

It would appear as though the moment of reckoning is fast approaching. If an agreement has not been reached by Friday when the Eurogroup of Finance Ministers meet in Riga it is quite likely that Greece will default.

The Greek government will likely maintain the support of the Greek population as they have have engaged with the Troika to the bitter end. If and when Greece finally defaults it will be able to place the blame squarely at the feet of the European elites.

“We will not sign up to targets we know our economy cannot meet by means of policies that our partners should not wish to impose,” said Varoufakis.

“We will compromise, we will compromise and we will compromise in order to come to a speedy agreement  … But we are not going to end up ‘being’ compromised. This is not what we were elected for.”

Various representatives of the Troika have tried to portray the Greek government as naive, unintelligent and disingenuous.

The consistent official narrative has been that Greece’s “radical left-wing government” has not put forward realistic proposals for restructuring the  government to reassure the Troika that it would meet its repayment obligations in the future.

The discussions have been private and the specifics of Greece’s various proposals since Syriza came to power in January have never been made public.

The track record of the Troika however, particularly with regards to Ireland, would suggest that their mandate is to protect the interests of banks –  at the expense of citizens – at nearly any cost.

With reference to a Greek request to delay its payments to the IMF Christine Lagarde told reporters, “It’s clearly not a course of action that would actually fit,” adding “We have never had an advanced economy ask for payment delays.”

Such intransigence is hardly appropriate at such a crucial time for the future of the Eurozone.

Draghi  played down the effect of a potential “Grexit”.  Draghi stated, “The short-term danger of contagion [from a Greek exit] is difficult to assess, but we have enough buffers in place. And even though they were designed for different circumstances, they are sufficient.” However, he did acknowledge that “we are entering uncharted waters.”

The European Central Bank has analyzed a scenario in which Greece runs out of euros and starts paying government employees with IOUs, creating a second currency within the euro bloc, people “with knowledge of the exercise” have told Reuters.

The ECB are considering the possibility that Greece will default in work undertaken by the so-called adverse scenarios group. Any default by Greece would force the ECB to act and possibly restrict Greek banks’ crucial lifeline access to emergency liquidity funding from the ECB.

Contagion is an increasing concern. The IMF’s Poul Thomsen warned “Nobody should think that a Grexit would not be without problems.” Bank “holidays” and capital controls are likely.

It is highly unlikely that the ECB has enough “buffers in place.” European banks fared badly in the Federal Reserve’s stress test report released last month on the basis of poor risk management.

The fallout from a Greek default is difficult to assess especially with the strong political will to hold the Euro together. But the potential for contagion in the bond markets and through credit default swaps is very real.

The outcome of such a development would like lead to bank failures across Europe. Bail-ins are now the rule and as was seen in Cyprus and now in Austria, bank deposits are no longer sacrosanct.

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MARKET UPDATE

Today’s AM LBMA Gold Price was USD 1,203.25, EUR 1,120.34 and GBP 806.31 per ounce.
Friday’s AM LBMA Gold Price was USD 1,204.55, EUR 1,113.83 and GBP 801.86 per ounce.

Gold rose 0.46 percent or $5.50 and closed at $1,204.50 an ounce Friday, while silver fell 0.18 percent or $0.03 closing at $16.26 an ounce. Gold and silver both finished down for the week at 0.31 percent and 1.39 percent respectively.

Gold held steady above $1,200 an ounce on a softer dollar today. In Singapore gold was unchanged at $1,205.30 an ounce in late morning trading in a tight range of $4.

China ramped up its QE program by slashing its reserve requirement ratio (RRR) by 19.5 percent to 18.5 percent for its largest banks, for the second time this year. In efforts to increase bank lending and prop up the falling Chinese property market and struggling Chinese economy.

The India Times noted that due to the low gold prices they expect to see at 25 percent increase in jewellery sales in Akshaya Tritiya.

A ‘Grexit’ may still be on the cards and the Eurozone finance ministers are scheduled to meet on Friday in Latvia. This should support gold this week.

The world’s largest gold ETF, the SPDR Gold Trust or GLD, had an inflow of just under 3 tonnes on Friday, bringing its total weekly inflow to 4.8 tonnes, the biggest since early February.

In London gold for immediate delivery in late morning trading is up 0.04 percent at $1,204.40 an ounce. Silver is up 0.11 percent at $16.27 an ounce and platinum is up 0.16 percent at $1,165.89 an ounce.

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