Greece and the Euro: To leave or not to leave, that is the question

Julian Phillips’ detailed geopolitical analysis of the dilemma facing the new Greek government as it weighs up the pros and cons of actually dropping the Euro – and the reason why Germany, the ECB and the more economically stable northern European nations can’t afford to let Greece go. The massive high stakes poker game is only just beginning!

As we watched the Prime Minister and the Finance Minister of Greece travel though Europe in a failed attempt to re-negotiate the terms of the “Bailout” it received, we find ourselves thinking quite differently to the mainstream commentators. Ours is not a jaundiced view but a realistic one. Pragmatism demands we do so. The prime underlying factors that will be brought into play are the interests of each side.

After all, countries don’t have friends they have interests, even with fellow members of the Eurozone. These will dictate the result and likely the tactics on each side. We do not see these as friendly negotiations at all. For Greece the stakes are higher than they are for the E.U.

Not Friends, only interests!

Cutting through the rhetoric and cordiality we have been seeing this week, the interests of each side are very clear.

Greece, while seeing the faults of the past since it joined the Eurozone, feels it has suffered enough punishment with a contraction of its GDP and what is now a perpetual debt crisis. It now believes the bailout has stripped the nation of its dignity.

The 25% contraction of GDP together with 50% of its youth unemployed and its skilled workforce leaving to find employment in other countries, Greece is bankrupt with no ability to repay its debt. It has little to lose. The statistics point to growth appearing again, but this is little more than cosmetic, as the damage already done will take generations to take Greece back to where it was. It doesn’t blame the E.U. entirely, which is why the new government will target the graft that has been a feature of Greek society for decades and enforce taxation on its very rich and until now, political classes who have ‘ducked’ paying up so far.

Greece has little more to lose as a default on their debt is imminent. They can’t repay the debt even if they wanted to, which they don’t. The election has committed the new government to that position. The question stands, “Is the new Government and the pain it now has, sufficient to take Greece back to the Drachma?”

With a new government voted in to clean up this mess and to give it room to recover through either the writing off or re-scheduling and restructuring of its debt, it has the mandate to do what is necessary to achieve this.  The two leaders have to be determined to achieve these results for if they aren’t they will commit political suicide and that of their party. This is what they are discussing this weekend.

We are reminded of 1919 when Germany itself felt the same when it had un-repayable reparation terms imposed on it at the end of the First World War and the impact it had on Germans then and for the next 25 years. Greece can’t follow that road, but if they feel strongly enough they can exit the euro and potentially the Eurozone!

On the other side, Germany and the strong northern members of the E.U. need a weak euro. The southern member states ensure that through their economic weakness they will continue to enjoy a weak and weakening euro. So they would not be happy to see Greece leave the euro or the Eurozone.

If Greece did leave it would ensure a major loss of international trade competitiveness, as the price of a strong euro would suck out the competitiveness of German and Northern member states goods, as their prices would jump with the euro. If that were to happen the euro would likely go much higher than its $1.40 peak of last year. No, the interests of the E.U. lie in keeping Greece and other southern member states economically weak, while retaining them in the Eurozone.

If we were able to measure the financial benefits to the strong member States of the E.U. we are in no doubt that the €250 billion in loans to Greece are only a small fraction of the profits gained because the euro has been much weaker than a Deutschemark would have been. Even at current levels the E.C.B. wants to see further falls in the euro exchange rate against global currencies, to stave off imminent deflation.

Spain, Italy and France are watching the events riveted to the potential outcome, which could spell the future of the Eurozone, either way. The hoped for integration of Eurozone member states always was a pipedream and a distraction from the real intent of the union of member states. As to the financial union under common rules of ehaviour the patterns of ehaviour differed so much before the formation of the E.U. that  integration of such differing people was at best a vague hope, no more. Greece joined because of what it could get out of the Eurozone as did Germany and all other members. Austerity has not worked for Greece. It simply brought the country to today, close to leaving the Eurozone as a bad, bankrupt, debtor.

If Greece is successful in renegotiating its debt, or if it leaves the Eurozone and the euro, we believe that other economically weak member states will contemplate following it back to their old currencies. Then weighing the new price of German imports against, say, cheap Chinese alternatives could lead to a further decimation of exports from Northern Eurozone member states.

The history of Europe for the last 2,000 years shows that national integration, as is present in the U.S.A., is nigh on impossible. To think that that was ever a real intention was naïve. No, Greeks are Greeks, Germans are German. Never the twain shall meet. So financial realities now come to bear.

No protection from Creditors for nations!

In the case of individuals, institutions and municipalities in the developed world, when an angry creditor chases a bankrupt debtor, credit protection measures slow down the creditor. The days when a debtor would go to prison are long passed. But in the Eurozone, at sovereign level, no such protections exist.

The realities facing creditor and debtor, in the case of Greece and the E.U. are that they must slug it out pushing their own interests first. When the bruising hurts and threatened damage real, then a settlement will be reached, not before then. The Eurozone can carry the loss of the Greek debt if need be and could even enjoy a much weaker euro thereafter, but only if they accede to Greece’s terms to a large extent. Greece has now drawn a line in the sand that defines its stance and cannot afford to budge.

Writing off debt becomes the most pragmatic of options, but it seems that the Greek ministers have already ruled that out weakening their position right at the start of the negotiations by saying they did not want to write off that debt, just renegotiate it. As they sit at home this weekend they may well be contemplating a much more dramatic stance as they face the wall of resistance they saw in the E.C.B. and in Germany.

No E.C.B. loans against Greek debt from January 11

The ECB and Germany have already started the chest beating with fear and volatility hitting Greece’s financial sector, putting the government on the back foot.

The E.C.B. has stated it will not continue to give funding against Greek bonds from January 11thonwards. This threw pressure onto the Greek banking system who have put on a brave face so far. But with Greece’s back now against the wall it appears that this first hostile act is giving a mandate to the two Greek Ministers to take very strong action at a potentially greater cost to the country, but an even greater cost to the Eurozone!

With E.U. Q.E. beginning in March, it appears that Greece will lose out there too. If the E.C.B. follows through by not accepting Greek Bonds in this program too [it seems more than likely that this is the next pressure the E.C.B. will impose] it could lead to the Greek population accepting a departure from the Eurozone and the euro.

Will Greece suffer more if it writes off its debt to the E.U.? After all, the big attraction to Greece of being a member of the E.U. was the major loans and finance it was to receive. It has had these and it seems they are now being cut off, so what more is there in it for Greece? Perhaps a return to a weak Drachma will lead to a boost to the Greek economy and allow its politicians to blame the E.U. for its new woes. That way the new government would be heroes, no matter what the damage a failure to renegotiate its debt brings to Greece. To fail to achieve an acceptable renegotiated debt package would discredit the new government and the entire country’s credibility, irrevocably. It would be political suicide for the new government.

The way forward for them is clear. They have to be fully prepared to leave the Eurozone, unless the benefits of staying in it bring huge new benefits to Greece and its people.

But that message has not got across to the E.U. or Germany, yet. Our only question of the Prime and Finance Minister of Greece is, “Do they have the personal resolve to walk out of the Eurozone or not?”

 Global consequences

A strong euro will hasten deflation in the Eurozone as well Draghi knows. The whole thrust of his quantitative easing policy is reliant on a weak euro. If a strong euro is seen, the entire globe will be affected. China sees the E.U. as its largest client, so a strong euro will see more Chinese goods flowing in or will deflation affect these no matter what their price is?

Deflation in the Eurozone will dampen that and affect the recovery in the U.S. The Fed is worried, as was seen in its statement of last week. The last time the FOMC statement made a direct reference to international turbulence was January 2013, when officials warned that “although strains in global financial markets have eased somewhat, the committee continues to see downside risks to the economic outlook.” Translated it means that Eurozone troubles are a danger to the U.S.’ recovery and could delay the raising of U.S. interest rates.

From now on, we expect growing currency volatility and a turning to gold and then silver, slowly but surely!

Julian Phillips is the founder and editor of www.goldforecaster.com and www.silverforecaster.com

Advertisements

Oil and copper crash – are we seeing start of next great depression?

Latest commentary on Mark O’Byrne’s Goldcore website – www.goldcore.com  looks at some disturbing possible scenarios.  Are we perhaps on the verge of a global depression?

Oil prices fell another 1 per cent this morning  and continue their collapse – down 57% in just over 6 months. Copper crashed 8% on the London Metal Exchange, plunging to 5 and a half year lows.

Oil fell to fresh six-year lows and has fallen almost 60 per cent since June 30, 2014 to levels last seen in early 2009 after the 2008 crash (see chart).

February Brent crude dropped another 79 cents to $45.80 a barrel and West Texas Intermediate crude for was at $45.34, down 55 cents. Copper for delivery in three months on the LME dropped as much as 8.7 percent to $5,353.25 a metric ton, the lowest intraday price since July 2009. Nickel slid 4.6 percent and lead fell 3.8 percent to the lowest in more than two years.

Commodities came under further pressure after the World Bank cut its forecasts for global growth, reinforcing worries of a gloomy economic outlook.

There has been much speculation in recent months as to the causes of oil’s dramatic crash in price. Some analysts have suggested that Saudi Arabia is attempting to put the U.S. shale oil industry out of business in order to keep the U.S. dependent on Saudi oil exports. Others suggest that prices were forced down by the Gulf states and the U.S. in order to damage Russia’s exports and its economy.

Copper Comex Spot HG Index - 1997 to January 14, 2015 (Thomson Reuters)

These may be factors but it is becoming increasingly clear that if they are, they are secondary factors to the major trend which is falling demand and a slowdown in the global economy – this is most pronounced in China, in Japan and in Europe.

We already have witnessed the customary New Year’s hype from many banks and governments that this year will finally be the year when economies come off the life-support of ultra low interest rates – even as they cheer-lead the ECB’s expected foray into QE and euro money printing.

However, the fact is that the omens for the economy this year are far from good. The most telling sign is not specifically that oil prices are collapsing but that it is happening in conjunction with the most widely used industrial metal – copper.

Copper fell over 8 per cent today, after a 1.3 per cent fall yesterday hitting its lowest level in nearly five years on the back of an 18% decline last year.

China has been the major user of the metal in recent years as its construction industry boomed. The Chinese housing and property market is now slowing down with the potential for a staggering collapse as dozens of “ghost cities” – brand new cities financed by reckless banks with nobody to occupy them – unwind.

The effects of such would be harsh on metal and commodity exporting countries, particularly those exposed to China like Australia and Brazil.

While copper has seen the most notable declines, other industrial metals are also faring poorly. According to Bloomberg, “A gauge of the six main industrial metals has declined 9.3 percent in the past 12 months to the lowest since June 7, 2010.”

Clearly global industrial production is slowing down.

When oil price declines are viewed against this backdrop a more worrying picture emerges. Oil prices are now at almost six-year lows and this despite record imports of oil by China.

The Financial Times report that trade data showed “China imported 30.37m tonnes of crude in December, up 19.5 per cent month-on-month.”

In only six months oil has lost 60% of it’s value. This may have been partly exacerbated by strategic maneuvering by various players but, by any standard, such a decline must be viewed with alarm.

The recent plunge in commodity prices and especially copper should also be viewed with alarm. It is said that copper should be known as Doctor Copper as the metal is said to have a PhD in Economics and the ability to predict future economic growth or a lack thereof.

Are we on the verge of a global depression?

Only, time will tell. The inability of central banks to stoke inflation and sustainable economic growth, statistics from Europe suggesting deflation, and stubborn and rising unemployment across the western world would suggest that it is a real possibility.

At the very least, the ‘great recession’ seems likely to continue. A serious recession or depression will likely collapse the already fragile banking system, especially in Europe, and the savings of ordinary people and companies will become exposed to bail-ins.

As ever, there are so many actors, factors and potential outcomes, it is unwise to predict exact outcomes. All we can be sure of is that the outlook is uncertain and unfortunately negative and we should prepare accordingly.

From a financial perspective, now is the time to be risk averse and diversify and favour safe haven assets such as safer forms of cash, bonds, hard assets and of course physical gold.

Click this link to read more commentary and data on the www.goldcore.com website

Is Russia really on the ropes: Could it sell its gold?

Is Russia really on the ropes: Could it sell its gold?

By Lawrence Williams

The problem with most of those delighting in Russia’s apparent comeuppance for what the West views as its expansionary destabilising tactics in Crimea and Donbass is that they aren’t Russian.  They assume Russians will act like Americans or western Europeans to a financial crisis and come rushing back, cap in hand, to beg forgiveness, return Crimea to its Ukrainian masters and withdraw any troops it may, or may not,  have in Donbass.  They should perhaps listen instead to Sergey Lavrov, the highly plausible and cultured Russian Foreign Minister who comments that Russia has survived such adversities in the past, and come out stronger as a result.

Yes, Lavrov is talking to his, and his masters’,  own political book but he also has a point.  Look at President Putin’s domestic popularity ratings.  They are riding at levels any western politician would give his or her eye teeth for.  Russians are a proud people who feel they were taken to the cleaners by the West pre-Putin during the break-up of the Soviet Union and now have a strong leader in charge who is putting Russia back on the map as a world power.

Russia is not a rich nation by any standards.  True there are some exorbitantly rich individuals and a growing middle class but the bulk of the population remains very poor by Western standards and feels it has nothing to lose anyway.  Those featuring in the Western media as suffering horrendously because their low interest dollar loans may now drive them into bankruptcy as the ruble dives against the dollar are but a minute fraction of the population.  The huge majority of Russians don’t have mortgages or dollar loans and while resultant inflation may eat into what little they do have, as Lavrov points out, they’ve been there before and come out stronger.

There is a strong feeling in Russia, no doubt promulgated by state controlled media, that the current financial crisis has been orchestrated by the U.S.-led West with sanctions and it views the rapid collapse of the oil price – the other major contributor to the nation’s economic problems – as also being politically driven by the U.S. and its ally Saudi Arabia.  Instead of dividing opinion against the Russian Government this looks so far to have only united opposition to the West, ans support for President Putin’s policies,  amongst the Russian general public.

And as for Russian gold.  The country has been building its gold reserves at a strong rate and there is little or no indication that it plans to sell any of this to relieve the strain on the ruble, but is far more likely to run down its foreign currency reserves before it even looks at selling gold as an option.  We are pretty sure that the Russian Central Bank has actually continued to buy gold in November and we should have the latest figures on this at the end of this week.  However the really sharp decline in the ruble against the dollar has only happened over the last week or so, so perhaps the November figures will not be a good guide to the very latest Russian Central Bank gold buying policy.

But the West should tread warily.  Russia is convinced of the view that the downfall of the Yanukovych Presidency in the Ukraine was totally orchestrated by the U.S. and its allies when it became apparent that he was leaning towards retaining economic ties to the Russian Federation rather than the EU.  Much of Russia’s subsequent response to ‘protect’ the ethnic Russians in Crimea and more recently in Donbass has been down to this, plus the perception in Moscow that the new Ukrainian government was anti-ethnic Russian and was to be dominated by ultra-right wing fascist leaning political groups (which is incorrect, although the right wing elements are still a powerful force and their militia involvements may well be largely responsible for the failure of the various ceasefire agreements in the southeast).  There was also the real fear, – there still is –  that the new Ukrainian government will push to join NATO and advance that alliance’s military presence right up to the south west Russian border.  Russia sees NATO encroachment as a major threat to it militarily, while the West regards the changes in the Ukraine and it joining the EU as integral part of the process of bringing true Western style democracy to Eastern Europe, while many within the western alliance would look upon expanding NATO as an important part of this.

Was it ever thus?  In the olden days the Crusades pitted Christian Western Europeans against Arab Muslims for the control of the Holy Land.  Nowadays it is not religious rivalries, but political dogma which drives such adventures and there is a real danger here that both the West and Russia will talk each other into military conflict as each side ups the ante to gain perceived political advantage.

Russia’s President Putin has a strong-man image to maintain, while the USA’s President Obama also feels the need to project his country’s strength of commitment to Europe, but this theatre is a long way from American soil so his fellow Americans don’t feel threatened.  But President Putin does feel threatened. NATO in the Ukraine is Putin’s Cuban missile crisis.  (Ironic given that the 50 year break in relations between the US and Cuba looks about to end.  It should also be noted that the 50 years of sanctions against Cuba never even brought that tiny nation to its knees!)  Putin thus sees NATO in Ukraine as a step too far by the West and it seems to this observer unlikely that a Western-initiated economic war against Russia will deter him from keeping at least a part of Ukraine on side – and if this requires an escalation of military involvement he would certainly have ground and supply advantage.

One strongly hopes it will not come to this.  The potential for escalation is enormous.  Maybe a Federal solution for the Ukraine is the answer, although the current government is strongly opposed to what it sees as fragmentation of its control – but even a Federation seems unlikely to get Crimea back.

The long and the short of it is that Western sanctions are unlikely to bring Russia to its knees.  Its economy was in a worse mess in 2008/9.  The declining ruble creates problems, but Russia has been building trade alliances with friendly states – notably China and its former satellites – and is taking other measures to avoid having to trade in U.S. dollars and the long term result here may well be yet another contributor to global reserve currency reform, perhaps over the next decade or so.  Russia sees having strong gold reserves as a key element in any future reserve currency realignment which it why this observer feels it unlikely it will dip into its gold reserves to any significant extent as a method of trying to arrest the ruble’s fall.  Indeed it has already stated it is willing to sell its currency reserves to do this.