Central Banks will have to Print More Money in Order to Prevent a Total Collapse of the Monetary System

By David Levenstein

In a sudden and unexpected turn of events, the new finance minister of Greece, Vassilis Rapanos, resigned from his post as he was taken ill before he could be sworn in on Friday. And, the newly elected Prime Minister, Mr Samaras, was released from hospital yesterday after undergoing eye surgery to repair a detached retina over the weekend. As he will have to stay home for several days he won’t be able to travel to Brussels for the EU summit this week.
The EU summit this Thursday and Friday comes just a week after Greece’s new coalition government was formed and it was widely believed that Greece was to use this opportunity to renegotiate some of the austerity measures it has agreed to in return for billions of euros in rescue loans from the International Monetary Fund and other European Union nations.
The situation in Greece becomes increasingly desperate by the day. By borrowing more money, the economy in Greece will not grow thus leading to higher levels of unemployment and further unrest not mention a continuation of a flight of capital. And, before things completely break down, the government will impose capital controls and an outright confiscation of wealth. Evidently, in Greece the government is already helping itself to people’s savings and pensions.
While fears of a Greek exit from the Eurozone and a collapse in the euro have abated somewhat, the fact that Greece has a new government means absolutely nothing, and the outcome of this election does nothing to alleviate the weak fundamentals in the Eurozone in particular in Spain and Italy.


Italy and Spain have their own financials problems and the bond market reaction to the Greek vote suggested that the Eurozone crisis is far from being resolved as yields continued to rise. Although an independent audit of Spanish banks showed that Spanish banks need between 60 billion and 70 billion euros ($75 billion to $88 billion) in capital, the Spanish Treasury managed to sell 2.22 billion euros ($2.81 billion) of bonds which was above a 2 billion-euro maximum target for the sale. Three-year bonds maturing in July 2015 fetched an average rate of 5.547%, compared with 4.876% on May 17, and the most since at least 2004. But, in spite of Spain’s deteriorating finances, Spanish banks that are essentially bankrupt managed to buy Spanish bonds. Obviously, these banks are buying bonds in an attempt to keep rates low because the longer Spain must pay high rates simply to raise the money needed to handle the government’s basic operations, the deeper into debt it will go and the more likely it will ultimately need the biggest European bailout which looks imminent within the next two years.
On Tuesday, the rating agency Moody’s Investors Service cut its rating on 28 Spanish banks and two issuer ratings today. The banks have several links to the sovereign, Moody’s said in a statement, and so Spain’s reduced creditworthiness “implies a weaker credit profile for Spanish banks.
“The banks’ exposure to commercial real estate was another factor in the cuts, Moody’s said, because higher losses are likely, “which might increase the likelihood that these banks will require external support.”
Among the downgrades was a cut to Banco Santander’s long-term rating to Baa2 from A3 and remains under review for further downgrades.  Santander has considerable operations throughout Latin America, including Brazil, the region’s largest economy. Its exposure in emerging markets, many of which are growing, helps offset its exposure in the Europe.  The rating agency also cut Banco Bilbao Vizcaya Argentaria SA to Baa3 from A3 – just barely above junk status. Bankia, which asked for a bailout last month, slid all the way to speculative grade, down to Ba2 from Baa3. Last month Moody’s downgraded 16 Spanish banks.  
In the meantime Italian borrowing costs are also increasing. Italy and Spain which account for more than a quarter of the euro-area economy, are heading for sovereign bailouts in the next 12 months that will send shockwaves through the global economy. What is interesting to note is that Spanish government debt is largely held by Spanish banks, Greece government debt by Greek banks, and Irish government debt by Irish banks. However, Italian government debt is held mainly by Germany, France, and Belgium in addition to the large holdings by Italian banks.
Evidently, according to an ECB official, who declined to be identified because the discussions were private, the ECB has decided to lower the minimum rating threshold for mortgage-backed securities to BBB- from A-. Spanish banks have been unable to use some securities as collateral because the rating is too low, the person said.
While bankrupt banks persist in borrowing money to increase their holdings of toxic assets, people will lose confidence in the monetary system and the flight of capital from countries such as Greece, Spain and Italy will escalate. But, as I don’t believe that the financial leaders of the Eurozone will allow a run on banks or a collapse of the banking sector, they will be forced to print more money… a lot more money. And, as they do this the rich and powerful will be protected at the expense of the masses. Soon we will see   ATM limits being imposed at many banks across the continent in addition to new capital controls as well as a hike in taxes.
So, instead of hording cash, prudent investors will turn to gold and silver. And, while speculators on Comex try their utmost to knock down the price of gold, any drop will be short-lived as demand for the physical will increase. And, as the decline in the value of fiat currencies accelerates, individuals who have accumulated gold and silver will be well rewarded.
TECHNICAL ANALYSIS
The price of gold failed to break above the key resistance of $1625/oz (R) and have now fallen back below the 50 day MA. However, there is major support at $1525/oz (S). I believe that prices will continue to consolidate between these two major levels.

About the author
David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.