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After 15 consecutive years of economic growth, Greece entered a recession in 2009. Greece’s GDP growth has also, as an average, since the early 1990s been higher than the EU average. However, the Greek economy faces significant problems, including rising unemployment levels, an inefficient government, tax evasion and political corruption. Between 2009 and 2011 unemployment skyrocketed, from 10.3% in 2009 to 16.2% on March 2011, an increase of 57.28% leaving more than 800,000 unemployed. In the last quarter of 2010, unemployment in the youth reached 36.1%. But, more than likely the real figures are much higher. Greece’s main industries are tourism, shipping, industrial products, food and tobacco processing, textiles, chemicals, metal products, mining and petroleum.
By the end of 2009, the Greek economy faced the highest budget deficit and government debt to GDP ratios in the EU. The 2009 budget deficit which stood at 15.4% of GDP as well as rising debt levels (127% of GDP in 2009) led to rising borrowing costs, resulting in a severe economic crisis. Since 2009 Greece has suffered from a shrinking GDP growth. It is estimated that the GDP growth in 2011 will be around $310 billion which is substantially less than what it owes.
Greece has a sovereign debt of some 340 billion euros ($482.5 billion) more than 30,000 euros per person in a population of 11.3 million.
On 23 April 2010, the Greek government requested that the EU/IMF bailout package (made of relatively high-interest loans) be activated. The size of the loan package was €110 billion ($157 billion) and its first installment covered €8.5 billion of Greek bonds that became due for repayment. On 27 April 2010, the Greek debt rating was decreased to BB+ (a ‘junk’ status) by Standard and Poor amid fears of default by the Greek government. The yield of the Greek two-year bond reached 15.3% in the secondary market. A year later the situation in Greece had deteriorated significantly and the yield on the two year bond was around 30%! Standard & Poor’s estimated that in the event of default investors would lose 30–50% of their money.
Around 53 billion euros of the original 110 billion euro bail-out package has been paid out so far. However, estimates show that Greek debt will reach about $350 billion euro by the end of this year, including the 12 billion emergency loan from the EU/IMF earmarked for July.
Simple mathematics shows that it will be practically impossible for Greece to service the debt never mind repay the loan at the current rates. Yet, despite this simple arithmetic equation, and in what I think is going to be a futile attempt to save the euro, EU leaders seem determined to grant debt-stricken Greece a second bailout.
On Friday, German Chancellor, Angela Merkel, said that leaders had struck “an important political accord for the stabilisation of the euro,” which Belgian Prime Minister Yves Leterme said took just half an hour to thrash out.
Euro finance ministers meanwhile will still have to flesh out the awkward detail of a 100-billion-euro-plus rescue by the time they next meet on Sunday July 3, the key deadline they need to meet in the rescue.
The immediate impact of Thursday’s deal should see Athens receive in mid-July a 12-billion-euro tranche of Eurozone and IMF loans from last year’s 110-billion euro bailout ($156 billion), which Greece needs to avert default. Even before the new bailout, Greece owes the equivalent of a year-and-a-half of total national economic output.
The new Greek bailout would combine fresh Eurozone loans and privatisation proceeds with a contribution from banks and other private investors who are being pressed to rollover Greek bonds coming due for redemption. A rollover is simply another way of agreeing to delay payment which in Greece’s case will not be forthcoming, this year, or next year or the next.
US Federal Reserve chief Ben Bernanke has warned that failure of the rescue efforts “would pose threats to the European financial systems, the global financial system and to European political unity.”
The Eurozone debt crisis represents the biggest threat to Britain’s financial stability, the Bank of England’s new watchdog warned on Friday.
“Sovereign and banking sector strains in some peripheral euro-area economies are the most material and immediate threat to UK financial stability,” said the minutes from the first meeting of the BoE’s Financial Policy Committee (FPC).
It added: “Market concerns remain over fiscal positions in a number of euro-area countries and the potential for contagion to banking systems.
“Any associated funding disruption to bank funding markets could spill over to UK banks.”
BoE governor Mervyn King, who chairs the committee, told reporters that the crisis was “the most serious and immediate risk”.
The FPC, set up to oversee financial stability in the wake of the credit crunch and global financial crisis, recommended that banks retain more of their profits earned during the good times in order to weather adverse shocks.
Although the UK banking sector has limited exposure to debt-ridden nations like Greece, the impact on Germany, France and other countries would have a knock-on effect, according to the committee.
“There is a risk that a sharp deterioration in vulnerable European economies may have adverse implications for credit conditions in larger European economies which are more heavily exposed, such as France and Germany,” the minutes read.
“In conditions of severe stress in the euro area this could increase the risk of losses to UK banks.”
French banks and insurance companies will participate in a new Greek financial rescue programme “on a voluntary basis”, French President Nicolas Sarkozy said Friday.
“The answer is yes, but it’s not only the banks but insurance companies and that was part of negotiations engaged with Angela Merkel,” Sarkozy said at a Brussels press conference responding to a reporter’s question.
“We’ve had a lot of meetings with French banks and insurance companies. And I can tell you that we know of meetings taking place in Eurozone countries with equivalent organisations and I can tell you,” he said. (As soon as Sarkozy said “there is no problem and nothing to fear,” I immediately knew that the opposite is true).
France is the country most exposed to Greek sovereign debt, mostly held by private institutions. In the banking sector, BNP Paribas holds five billion euros in Greek debt, Societe Generale holds 2.5 billion euros and Credit Agricole holds 600 million euros. Insurance group AXA is exposed to 300 million euros and CNP Assurances 127 million euros. It comes as no surprise Sarkozy is trying to avoid a default. And, I don’t think it has anything to do with helping Greece. As far as I am concerned, by observing Sarkozy’s determination to avoid a default, I wouldn’t be surprised if he was a large investor in French banks and Greek debt.
While a default by Greece would have a huge impact on the banks that hold its debt, including the ECB, IMF and the large French and German lenders, a default in the future would have an even greater devastating effect simply because the amount will be a lot more.
In an effort to protect themselves from the collapse of their banks and government, Greek citizens are emptying savings accounts and buying gold. Sales of gold coins have soared as savers seek a safer and fungible source of value. “When the global financial crisis started, our sales of coins to investors overtook bullion for the first time,” said Harry Krinakis, at Sepheriades, a Greek precious metals trader. “Now the sales ratio has reached five to one.”
I say, “Bravo,” to those Greek individuals who have put their faith in gold instead of their government. As I have mentioned in the past, put your trust in gold and not in politicians.
TECHNICAL ANALYSIS
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.
