Gold News

Gold and the Greek 'Bankers' Ramp'

Athens' "big no" squares off against the Eurozone's special flavor of bankers' ramp...

SO the 'troika' of Greece's bail-out lenders all got the memo, writes Adrian Ash at BullionVault.

"The ball is in Greece's court," as they keep repeating.

But what if Athens wants it that way? Finance minister Varoufakis is a professor of 'game theory' in economics after all (even if he isn't a "real" Marxist).

And as the Greek government now says...finally grabbing a catch-phrase of its isn't afraid of "saying the Big No" to more bail-out loans, and the austerity forever needed to repay them.

The "big no" means default and most likely Grexit. But while waving that threat at its lenders, Athens also holds out a plan. Long on detail and very heavy on Greek reforms, it asks for maybe €27 billion to write off the debt Greece now owes the European Central Bank.

Out of €242bn currently owed, that looks small. And if Greece ran its own the way that Japan, the US and the UK could borrow this cash through a QE programme. Then, simply get the central bank to cancel it at maturity, just like Japan, the US and UK will most likely do in the end.

But Athens doesn't run its own money. Indeed, it's not even part of a currency union according to this article...perhaps the best you'll read on Greece's catastrophe today.

Instead, Greece is subject to a foreign currency regime, just like any banana republic. So what was initially sold back in 2010 as "saving Greece" quickly showed itself to be "saving its lenders"...most notably those German and French banks which had lent Athens too much money during the good times of fake accounting and Euro-love. a uniquely Eurozone replay of Britain quitting the Gold Standard in 1931...Athens' left-wing government says it's suffering a "bankers' ramp", with whispers and rumours from the Greek central bank and Athens' Eurozone "partners" scaring Greek citizens into pulling what's left of their cash from the banks, forcing the very banking collapse which the central bank, IMF, Eurozone and ECB say they want to avoid.

A replay, because a monetary system built on maintaining payments in a high-value currency risks losing a member state which cannot service its debts while meeting its domestic promises. Something has to give, and the creditors would much prefer that democracy caved in, and they get their repayments while voters lose benefits and pay higher taxes. Different because 1931's top-hatted villains were blamed (rightly or not) for trying to control London's fiscal policy by redeeming their Sterling bank-notes for gold, and for selling British bonds to drive up London's borrowing costs. Today's ramp in contrast cannot hurt Greece by selling Euros, and Athens' bonds are already off the market anyway, tucked away on the ECB, IMF and Eurozone lenders' own balancesheets.

So, creating a crisis to defeat Greek democracy apparently means urging Greek citizens to start a run on their banks. Net effect? A gun to the head. The fright caused by Athens' own threat of uttering the "big no" can't help either. Maybe that's part of Syriza's game-plan.

Who is bluffing in this stand-off? Not Greece's angry, jobless youth. Perhaps not the old regime's favored elite, massing last night on the steps of parliament either. To say this could get a country only four decades on from an army coup...might sound alarmist. But as plenty of people noted 5 years ago when Greece's mess first made the headlines, this really isn't how Europe's post-war project was supposed to end...with bitter wrangling over money and an economic, social catastrophe on its south-eastern coast.

Politics and history aside for a moment, there's growing chatter of an immediate threat to cautious savers, wherever they are. Because whether or not you hold bank deposits in Greece, people are asking about precious metals:

Might Athens sell its 112 tonnes in gold bullion reserves?

Never say never. The mere hint that Cyprus might sell a fraction of its tiny 14-tonne reserves when it "enjoyed" a rescue by Eurozone partners proved a straw on the camel’s back of $1530 in April 2013.

But Cyprus never did sell, and it’s very hard to imagine much of Greece’s gold reserves being sold to raise cash, not least because Athens' hoard is worth only a fraction of the €242bn it owes in total.

What’s more, keeping hold of those gold reserves...held 50% in Athens, and 50% split between the New York Fed, Bank of England, and Swiss National Bank...will likely play a big psychological role in establishing a new currency if the Bank of Greece quits the Euro system. See the political value attached to gold, for instance, by the Syriza government’s would-be friends in the Kremlin.

Pledging gold against new bail-out loans is more possible. Again, it would add just a drop in the bucket, but international loans have previously been part-collateralized with bullion. See India’s emergency 1991 loan of $2.2bn for instance, raised against 67 tonnes of gold then worth $800m. The World Gold Council suggested Italy do the same in 2013, only via private lenders, as an alternative to the need for austerity.

Sadly for Greece, dumping its gold offers no alternative anyway. Selling or pledging the total would only raise €3.8 billion ($4.3bn, £2.7bn) today. Which brings Athens right back to the nub of the problem.

The only possible outcome to Monday's emergency summit is a debt write-down for the lenders...whether they want or agree it or not.

This needn't be a moral issue, although it is for Greece's youth and future generations today, just as surely as debt servitude was a moral horror when Solon banned it in 6th century BC Athens.

No, in the end, the creditors must bear losses on excessive debt. Because the bankrupt borrower hasn't got any money.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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