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Greek debt crisis will impact gold

The government of Greece owes more than 400 billion euros worth of debt to the European Central Bank and to major banks in Europe, the U.S. and elsewhere. There are no reasonable prospects that more than a tiny fraction of this total will ever be repaid.

Will a temporary solution to Greece's debt problems spark gold prices?

Will a temporary solution to Greece’s debt problems spark gold prices?

A new government was recently elected in Greece, headed by a party opposed to the government austerity measures imposed by the European Central Bank as it provided the more than 200 billion euros of bailouts to the Greek government. The newly elected politicians are trying to take a hard stand in demanding that a substantial amount of the debt owed be eliminated and that the austerity measures forced on the Greek government be removed.

In turn, the European Central Bank and the International Monetary Fund are also taking a hard line of no more bailouts unless the Greek government implements serious reforms that would hopefully enable debt repayment down the road.

Negotiators are meeting almost constantly to try to resolve this impasse. The Greek government set a Feb. 28 deadline to reach a new agreement.

The outcome of this crisis will have multiple major repercussions across the financial world:

  1. Thus far, many of the central and private banks holding Greek government debt still list it on their books at full face value. To the extent that Greece formally defaults on repayment or negotiates to make only partial payments, these banks will be forced to records tens of billions in bad debts. Several private banks in Europe and the U.S. could potentially become insolvent if this were to occur.
  1. One possible outcome, if no agreement is reached, is that Greece might become the first member of the euro currency zone to cease using this multinational currency. If this were to occur, the Greek government would almost certainly be forced into bankruptcy, and be forced to repudiate large amounts of debt. This would be a major financial hit to the holders of Greek government debt.
  1. If Greece were to leave the European Monetary Union or were permitted to repudiate some debt, that would increase the pressure from central banks in Italy, Spain, Portugal, and Ireland to do the same. This could result in a major exit of financially weak nations from the monetary union. Should this come to pass, it is possible that the remaining nations using the euro would provide a strong financial basis for that currency. Although the euro has been weak, hitting multi-year lows against the U.S. dollar this year, the currency could shoot up against other currencies before the end of 2015.
  1. A collapse in the value of Greek government debt would clobber banks with bad debt. If the euro were to then become stronger, banks that have shorted the euro would take a second round of losses. Many of these losses could trigger widespread defaults on derivatives contracts that theoretically exist to protect banks from such catastrophes. However, when major losses hit many major banks at the same time, they will be unable stop the domino chain of defaulted derivatives.

In other words, not only might the government of Greece suffer horrible consequences if an agreement is not reached, so too would central banks and major private banks worldwide.

All parties know what is at stake in the negotiations. The Greek economy has deteriorated so far that there is no practical solution available. In effect, the posture of the Greek politicians is that if they do not get major concessions, they are willing to drag down Greece and the rest of the world. On the other side, the European Central Bank knows that Greece will suffer economically unless it receives another quick bailout (which will almost certainly never be repaid), but that it will ultimately cost the rest of the world more than if Greece failed now.

Will anything be resolved before the Feb. 28 deadline set by the Greek government? Obviously, no genuine solution will be found. Look for the deadline to be extended anywhere from a couple of weeks to six months. My expectation is that both parties will blink and agree to give up some of their demands in order to put in a temporary patch of another bailout to the Greek government. Unfortunately, even if the parties declare that the crisis has been managed—standard political posturing—don’t believe it.

The Greek government debt will default at some point. So, if it doesn’t come to pass this week, the problem will get worse and just occur later.

What are Greek citizens doing about this building financial catastrophe? They are purchasing record amounts of physical gold. For thousands of years, physical gold and silver have provided financial stability in times of crisis. They are once more serving that purpose.

My column last week drew some comments that it was only peripherally related to numismatics and precious metals, so it was questionable that it deserved to be written at all and in this venue. Actually, the subject of the evolution of efforts to eventually have the U.S. government replace all private retirement assets (including those in precious metals IRAs) with U.S. Treasury debt has a major impact on numismatics today and into the future.

There are multiple coin dealers hyping precious metals Individual Retirement Accounts as a way for individuals to own gold and silver. I discussed the subject more thoroughly in my Aug. 18, 2009, Numismaster.com column (available at   http://www.numismaster.com/ta/numis/Article.jsp?ad=article&ArticleId=7361#). There are multiple negatives about owning a precious metals IRA as I list in the prior column, beyond the risk that the U.S. government will turn those assets into Treasury debt.

However, one dealer claims that they have sold precious metals IRA assets to hundreds of thousands of customers. If true, and I have no way to verify this claim, that would almost certainly represent hundreds of millions of dollars that are only being spent on selected precious metals products, with none of these funds being spent on typical numismatic coins and paper money. So, yes the subject is relevant to numismatics.

In my mind, coin dealers who encourage their customers to establish precious metals IRAs without disclosure of the negatives I list in my article or the risk that the assets may be seized by the U.S. government are failing to provide good customer service.

There was also a comment to last week’s column to the effect that the U.S. government will never bribe people to turn in their private retirement account assets to be replaced with U.S. government debt. This probably reflects what is called the “normalcy bias.” The normalcy bias means that people tend to only look at the future as being much the same as it is right now.

People with a normalcy bias would not have expected President Franklin Roosevelt to issue an executive order in 1933 to require Americans to turn in their gold coins and gold certificates of more than $100 face value in a mandatory, fully-compensated (at the time) redemption program. They may also be like many citizens over the past several years in Argentina, Hungary, Poland, France, Bulgaria, Ireland, Portugal, and the Dominican Republic that did not expect their governments to completely or partially nationalize their private retirement assets.

Part of what I write is anticipating what could occur in the future. Not every possible scenario will come to pass. But, many have already occurred. It is up to readers to do their own research beyond what I write to make their own decisions on what to do with their assets.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Mich.

 

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2 Responses to Greek debt crisis will impact gold

  1. modrare says:

    Excellent article! Kudos to Patrick Heller for tackling the tough subjects!
    I fully agree that every possible scenario should be looked at. Including bank “bail-ins” a la Cypress. Believe, also, that the too big to fail banks are worse off today than before the economy tanked….and that they are considering all possibilities to see their way through another similar occurrence. The government doesn’t have the wherewithal for another rescue. It will be up to the banks to plot themselves a course that keeps them solvent. http://www.reuters.com/article/2012/08/10/us-banks-recoveryplans-idUSBRE87905N20120810
    I’m sure that our government regards retirement funds as the low hanging fruit of the investment world. These would be the easiest to go after. Other countries have already raided retirement funds…and our government has looked hard at doing so on a a few occasions, but backed off.
    If, or when, this comes to pass, “they” will likely be “doing it for our own good” to “protect us”. By requiring 50% of our retirement funds be in 20-Year Treasuries or something else they can inflate away to nothing! Or a similar scenario!

  2. searle@bex.net says:

    Sure, precious metals will skyrocket if the feds start seizing assets. They will also skyrocket in the financial mayhem that would follow if all taxes are abolished, but I would not present either one as a plausible scenario. When you tie your credibility to some crazy person making a crazy proposal to Congress in 2008, reasonable readers are going to paint you with the same brush. Then add in your continued delusional denials of an economic recovery that is obviously well underway as shown by multiple sources (in addition to government reports that your conspiracy theory thinking writes off as “deceptive”, “misleading” and out to “fool the public.” Pat, I have no problem with you wanting to tell NN readers to be careful and do research before investing their money in something. But as a NN writer, I think you owe it to readers to give them complete, accurate, and unbiased information upon which to base their collecting and investing choices.

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