Will a Greek Default usher in more QE?
Following years of negotiations and political brinkmanship, it appears increasingly likely that Greece is on the verge of defaulting on its debt obligations, a move that could see the country potentially withdraw from the EU altogether. News from Europe this weekend has been fluid, with Greece rejecting a revised proposal from creditors which would have released up to EUR 15.5b over the course of the next five months. The Greek government rejected the deal due to the severe level of reforms and austerity which accompanied the package, and have opted to put the proposals to the Greek people, who will decide whether to accept them or not via a referendum scheduled for next Sunday.
With a EUR 3bn payment due to the IMF on June 30 – time was never on Greece’s side, but further news out of the Eurogroup meeting this weekend that the recent bailout proposals will expire this Tuesday night appears to have slammed what tiny window of opportunity remained tightly shut. Without a bailout package on the table, it is increasingly unclear what Greek citizens will be voting for next Sunday. As a result, a default looks almost certain.
The immediate concern for many market participants will be the extent of the fallout unleashed this week, but there are also some interesting repercussions for Europe, and global financial markets in the long run as a result of a Greek default. Not least of which is the potential ratcheting up of the QE program currently in place by the ECB.
Markets Bracing themselves for “Black Monday”
There are already signs that some Greek banks will fail to open on monday, and those that do are likely to have severe restrictions on the amount of transactions customers are able to perform. Unprecedented cash withdrawals last week and over the weekend are likely to continue on Monday, and with Greek officials warning that the stock market may not open, the exit door for skittish investors is becoming increasingly narrow. Should Greek markets remain closed on Monday there is likely to be severe selling pressure across Greek proxies globally, most obvious targets being European financial stocks. Outsized moves across this sector will be the first real test of confidence in EU markets since the height of the periphery debt crisis in 2013. Since then, stability in the bond market of troubled EU nations has created a sense of complacency and it is unclear just how prepared the market is for the coming event.
The Euro is likely to come under pressure in the short term, again largely a reflection of capital flight from the EU as a whole, but longer term the single currency could begin strengthening now that the headline risk of Greece has subsided. The weak Euro has been the the single greatest advantage for the core European nations of Germany and France during this whole saga, and they will be unwilling to see any significant appreciation of the Euro from current levels. A strengthening Euro would have significant ramifications for Germany’s export market and will be avoided at all costs. “Avoided at all costs” most likely opens the door for more aggressive QE from the ECB. While the market by and large has not started pricing this in, it remains a realistic probability going forward. If the ECB continues to ease, then it would be safe to say that the Federal Reserve will avoid raising rates for the foreseeable future. This could well see the Euro reach parity with the dollar in short order.
While the market is assigning a low probability of the ECB engaging in more QE, it remains one of the more logical long term consequences of the current crisis in the long run, with significant implications for the precious metals market.
Gold is becoming the private bank of the People
The gold market looks set to enter a period of heightened volatility in the coming days. Should a worldwide market rout begin to unfold, it is very likely gold will sell off in sympathy as part of a world wide flight to cash, but the current Greek crisis will spark more investors appetite for gold going forward. If this current crisis has taught us anything, it must surely be just how fragile an individual’s access to their savings can be during times of turmoil. Capital controls, bank holidays, and stock market closures leave little to the imagination. Greek deposits are in limbo, and those with gold are fast realizing its importance as insurance against systemic risk within the system. If Greece defaults, it is unlikely to be the last country to do so over the coming years. The global level of indebtedness is unsustainable and we are entering into a new phase of the economic crisis which has failed to disappear since 2008. We are on the eve of a new chapter of this crisis, and it is becoming increasingly clear that individuals, not institutions will bear the brunt of these turbulent times.