Will Reducing Greece's Debt from 160% to 120% Make Any Difference?
Thursday, February 9, 2012
In today's chart of the day, we present an overview of Greece's dire fiscal condition in the wake of the so-called accord by Greek politicians for another round of austerity. The following chart provided by Germany's Der Spiegel shows the futility that two-years of austerity measures have had in reducing Greece's debt burden to sustainable levels.
It doesn't take a genius to see that Greece's debt problem has been skyrocketing, and this increase hasn't been materially slowed despite two-years of austerity measures. The bottom of the chart highlights Greece's economic tumble, with GDP clearly falling at an accelerating rate in 2011.
The latest Greek accord is set to make Greece's economy even more troubled as the minimum wage is set to be cut 22%, pensions are to be cut by 300 million EUR, and 15,000 government workers are set to lose their job. With Greece's unemployment rate already above 20%, these measures are set to further depress the Greek economy.
Illustrative of Greece's economic freefall, tax revenues in the first month of January are down 6%-7% year over year.
Current Debt Reduction Plan is Not Enough
Private creditors are poised to take a 70% loss on their Greek securities if and when negotiations are finalized. However, this would only take Greek debt-to-GDP down to 120% by 2020 by reducing the country's total debt burden by 100 billion EUR. It is clear that if Greece is to have a sustainable debt burden, public sector bond holders need to take an equivalent loss. This means the ECB will need to step up to the plate and also take a massive haircut. While this could diminish confidence in Europe's Central Bank, without such a move, it is highly unlikely that Greece won't need another bailout further down the line.
Upcoming ECB LTRO and Possible Fed QE3 will Likely Matter More for Gold and Silver
The only positive thing that can be said about Greece today is that it is likely that a Greek, Lehman like moment has likely again been pushed back by at least a few months. What is more important for precious metals however will likely be the upcoming second Long Term Refinancing Operation (LTRO) by the ECB. In the first go-around, the ECB provided 489 billion EUR of liquidity for a liquidity-starved European banking system. The move largely coincided with the bottom in the fourth quarter downturn in both gold and silver. Since their respective bottom in mid-December, both metals have outperformed other asset classes amid a general rise in the EUR-USD exchange rate.
The second LTRO is scheduled for February 29th, and current expectations see a take-up exceeding the first operation. It is hard to see how this amount of liquidity won't find its way into the precious metals market.
Similarly, any sign that European troubles, or weakness out of Asia is hitting the still fragile U.S. economy will immediately raise hopes for another round of bond buying by Ben Bernanke and the Federal Reserve. This too would have a positive impact on precious metals as lower rates increase the attractiveness of gold and silver.
While the Greek situation is important, anticipation for the second LTRO and any hint of another quantitative easing program by the Fed will likely be a more significant factor for gold and silver prices in the days and weeks ahead.
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