Greece

We have all heard about the Greek crisis by now.

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On Wednesday, Greece formally asked for a three-year bailout. The European Union’s leaders have given a Sunday deadline on whether formal negotiations on this bailout program make sense or not.

So, How Will a Resolution Impact Metal Prices?

First, let’s start with: Greece is not China. Greece is not a major producer or consumer of metals. Therefore, its economic situation doesn’t have that big of an impact in the supply and demand balance of any base metal.

Some argue that a Greek exit could worsen the European economy. That, in theory, could deteriorate global demand for metals, driving metal prices down. Nonetheless, others (including me) think that a Greek exit would be beneficial for both Greece and Europe.

Austerity measures have already proven to be painful for the country over the past few years, leading to its economy slowing further, making its deficit even worse. A Grexit, however, would leave Greece with the ability to print money, which would increase inflation but allow Greece to meet its national obligations in a potentially more viable way than raising taxes and reducing pensions.

In either case, these are just opinions, no matter how informed they are. There is no obvious answer for the question since we don’t even have a precedent to compare the situation to. A national default in a currency block such as the Eurozone is truly unprecedented. Moreover, the longer-term costs — and any possible benefits — could take years to become apparent.

What This Means For Metal Buyers

Therefore, in the short/medium term, we believe that whether Greece exits the euro or not is irrelevant when it comes to metal prices. The only thing that matters is how the market will react to the news, which we don’t yet know. That Greece is in a bad situation is already well known, maybe any change from its current position will only be taken as positive. Who knows?

We are, however, keeping an eye on the euro exchange rate. A further depreciation of the euro against the dollar would normally be bad for commodities. So far, we are seeing the dollar remain strong against the euro and this seems to favor a continuation of the bearish market commodities such as metals are in.

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Metals, especially copper, experienced plummeting prices Monday as the world reacted to Greece’s no vote on whether or not to accept more austerity measures from the European Union. The Organization for Economic Cooperation and Development (OECD) also came no closer to phasing out coal subsidies for member nations.

Greek Debt Crisis Hurts Metals, Other Commodities

Most commodity prices suffered on Monday after Greece rejected terms for a bailout and top consumer China unleashed emergency measures over the weekend to prevent a full-blown stock market crash.

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“The thing to watch is the Euro/Dollar exchange rate. If the dollar starts going up as a result of what happened, that would exacerbate an already bearish commodities and metals markets,” said MetalMiner Executive Editor and Co-Founder Lisa Reisman.

Brent crude fell below $60 per barrel on Monday, to levels last seen in April. Chinese steel prices are now at their lowest since the peak of the global financial crisis in 2009, with futures down 70% to around 2,000 CNY per metric ton.

“A lot of bad news out of China will be very bearish as well and we don’t yet know how much of that crisis has been factored into the current market,” Reisman added.

Three-month copper on the London Metal Exchange hit its weakest since mid-March at $5,640 a mt, down by 2%.

“The longer term question of Greece is also one that goes unanswered – what is the long term health of the European Union? That could have a long term impact but not a short term one,” Resisman said.

OECD No Closer to Ending Coal Subsidies

A decision on phasing out a form of coal subsidy is unlikely to come soon but discussions among members of the Organization for Economic Cooperation and Development continue ahead of UN climate talks, the OECD’s secretary-general said on Friday.The OECD has been trying for a year to get an agreement from its 34 member nations on ending export credits for technology used to produce coal, the most polluting of the fossil fuels.

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So the Greek tragedy rolls on; expect considerable volatility this week, certainly on European markets and for the Euro currency following the Greek government’s decision to announce a bank holiday for more than a week.

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The country’s stock-market was suspended and automated teller machine withdrawals across Greece were capped at €60 (US $66) as banks began to run out of money. Many Greeks have already begun resorting to the barter system as they are simply unable to obtain more cash.

Greece faces a debt default within 48 hours after the government made clear it will not, indeed cannot, repay a €1.5 billion loan to the International Monetary Fund that expires today.

What Syriza Hath Wrought

In a sense, the tragedy here is the success of the leftist Syriza party in being elected to office in the first place, supposedly on a mandate to end austerity just as the Greek economy, by many measures, was turning the corner.

At the end of 2014, Alexis Tsipras’ new government took over one of the fastest growing economies in the Eurozone, with an expected budget surplus this year and then drove it directly into a brick wall. Tax receipts collapsed, the surplus turned into a budget deficit within weeks and now the country is on the verge of default.

Not that non-payment of IMF loans automatically puts a country into default, but failure to pay next month’s much larger European Central Bank re-payments will. In addition, Greece’s banks are teetering on the edge of collapse due to a lack of liquidity.

According to the Telegraph Greeks have pulled €30 billion from the financial system since Syriza was elected five months ago, with many hoarding cash in their homes or sending it overseas. Syriza is playing a dangerous game of chicken with their fellow European partners and the IMF, yet both the US and France are desperate for Greece to remain within the Eurozone and for a compromise to be found.

A Referendum on What, Exactly?

The latest move from Athens is to announce a referendum for the Greek people to decide, but at the moment the two sides — the EU and Syria — can’t even agree what the proposal is. What Syriza intends to put up to the vote is unclear. In such an emotionally charged atmosphere even a clear set of proposals should be debated for weeks before being put to a vote, yet the government is saying it will go to the people as early as this coming weekend.

However poorly the Greek government is playing it’s cards our expectation is still that a last minute fudge will be found but it is looking increasingly finely balanced and we should not under estimate the strength of feeling that is running in Athens in spite of the consequences if their game of brinkmanship fails.

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Greece seems to be teetering on the edge yet again.
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We wrote last year, and this year, as the Greek crisis waned and the international media assumed the problems had been solved that Greece had the potential to come back and make a re-appearance and it certainly has.

ECB, IMF, World Bank Troika

If the troika of the European Central Bank, the International Monetary Fund and World Bank don’t agree on a way forward to release further funds, Greece will default on it’s €1.5 billion repayment due to the IMF at the end of June and the €3.5 billion due to the ECB on July 20.

These are sizable sums of money for a government with no reserves and struggling to meet monthly wage bills, let alone pay suppliers for goods and services, an obligation it has foregone for some months now.

A last minute reprieve may be on the table with proposals the leftist Syriza government coalition has put forward this week. Finally these include proposals to address at least one of two key sticking points. First is raising the pension age to 67, the sticking point is the time frame, both when to start and when the process should conclude.

What Syriza Wants

Athens wants it to be phased in up to 2025 but the troika want it faster. Still, it is at least being discussed now and shows potential. Greek pensions are probably un-payable in the long run as this graph below underlines. Ultimately, a state pension has to fall somewhere in relation to the country’s ability to pay and Greece can’t afford for workers to retire in their early 60’s or sooner and then receive anymore than a subsistence pension; the reality is the country can’t afford it.

In their defense, it should be said, according to the Greek government, 45% of pensioners receive monthly payments below the poverty line of €665. The pensions aren’t generous in overall terms, only in relation to the country’s ability to fund them and the relatively early age that they start.

Screen Shot 2015-06-23 at 08.36.23

Source: Financial Times

The other sticking point is Greece’s value-added tax and raising taxes, in general. The troika want 23% VAT rates to be applied on pretty much everything except food and medicines which would be taxed at a lower rate, but Athens is proposing a number of other sectors be included in the lower rate including energy. But Syriza is also proposing to squeeze businesses further by increasing corporation tax with a one-off 12% tax on corporate profits above €500 million.

The VAT Question

The FT estimates it would raise an additional €945 million this year and another €405 million next year, but would eventually be phased out. The sticking point on the VAT is energy according to a Market Watch report with Athens adamant the VAT should not be more than 13% as this impacts the poorest in society disproportionately but the irony is no one is paying their energy bills, anyway. Last week, the Greek electric power authority reported that its unpaid bills reached €1.9 billion in 2015, more than enough to meet the IMF’s end of month payment on its own.

A more lasting proposal from the government is to raise overall corporate taxes from 26% to 29%, bringing in an additional €410 million next year – assuming companies pay it, of course. Tax revenue is one of the fundamental problems in Greece, whether corporate or private, tax receipts have collapsed particularly among individual taxpayers as people have simply failed to fill in tax forms while they wait to see what happens.

Meanwhile, defaults on bank loans are widespread, around 70% of restructured mortgages aren’t being paid and the banking system is freezing up. Government tax revenues for May were €1 billion short of the budget target exacerbating the state’s problems in trying to meet even day-to-day payments.

In the medium- to longer-term, Greece will need debt relief. To suggest the country can pay off its debts over the next 10-15 years is to consign Greek society to long-term austerity and, as we have seen with the election of the Syriza government, they won’t accept that.

For now, Europe will, for the sake of the Euro and appearances, muddle through with yet another 11th hour fudge. But Athens’ proposals will not be met in full. Pension payments will be higher, tax receipts will be lower and until Germany faces up to debt relief this problem will not go away.

Not that Greece couldn’t leave the Euro. It could and both Europe and Greece would survive but, politically, Euro block politicians do not want to admit the model is flawed and will continue to seek ways of keeping the shambles together. We don’t see a Grexit at this stage. It could come down the road, although northern European politicians are clearly getting more than exasperated with the situation, they are likely to find a way to make it work. Or at least keep the show on the road and continue to advance good money after bad in the hope something will turn up or it won’t blow up until they are out of office.

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There are several potential sources of financial shock to markets this year but for the financial markets an exit from the Eurozone by Greece, while potentially serious, seems to have slipped from the headlines as being very unlikely of late.

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Earlier this year, the press was awash with dramatic headlines on the probability that Greece’s new leftist government, led by the Syriza party, would lead the country out of the euro in protest at the punitive terms placed on the people in return for Europe’s continued support.

Kicking the Greek Debt Problem Down The Road

The domino effect of other ClubMed countries voting in equally anti-austerity parties was raised as the nuclear result of a Greek exit. But the rounds of meetings between Greece and the Troika got so tedious and the progress so glacial that the markets began to lose interest as the problem of how Greece was to repay its debts seemed to be kicked down the road. First by weeks, then by months.

But it would be a mistake to think that the problem has gone away. Central to Greece meeting its terms is the ability of the state to raise sufficient taxes to meet debt repayments when they come due.

The country’s debt pile has risen form 154% of GDP in 2012 to 177% in 2014, that’s a staggering €317 billion (or $336 billion). Syriza’s problem could be said to be of Syriza’s making. The party came into power on a wave of public support and optimism based, in large part, on what they promised in the election campaign, backed by the threat that if the EU didn’t agree Greece would leave the euro.

Campaigning Vs. Governing

Once in office, though, they immediately reversed certain austerity steps but, more significantly, both business and the population positioned themselves for what they expected to happen next. Companies and individuals sent funds overseas in expectation that Greece may leave the euro and any funds held in Greek banks would be converted into Drachma (or whatever would replace the euro) at a much lower rate.

As a result of the cash outflow, the country’s banks are being kept alive through emergency funds (ELA) from the European Central Bank. The ECB has been forced to hike the limits on this cash on a weekly basis as capital has fled the country, a London Telegraph article reports. A further €800 million was drip-fed to banks on Tuesday to keep them solvent. What’s worse is that everyone stopped paying taxes as the money fled Greece.

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We have briefly covered Greece’s decision to vote in the far left “anti-austerity” Syriza party in posts this week, mentioning the short-term impact it has had on copper and gold prices.

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In truth, though, the outcome of the election had been largely priced into both commodity prices and foreign exchange rates, so although the euro weakened on the news it has not crashed. Switzerland’s removal of the Franc’s peg to the euro had more impact and the European Central Bank’s annnouncement of a quantitative easing program was equally disruptive. But Syriza’s election and formation of the government with the help of the far-right Independent Greeks party will certainly start a period of considerable volatility in European markets as negotiations are conducted in the glare of publicity, and no doubt behind closed doors, about Greece’s future in the European single currency.

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Any failure to meet austerity commitments to the European Central Bank, International Monetary Fund and European Commission next month by Greece will see the next tranche of loans not being paid by the troika of at the end of February. As liquidity from the ECB to Greece’s banks dries up, a banking crisis will ensue.

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Not surprisingly, private money is already heading for the door, some €8 billion of deposits have been pulled since November when the election was called. So, who will blink first? Syriza or the troika?

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Europe is once again in the news as a cause of fear in the financial markets. This time it’s not due to Greece or any of the Club Med countries but more due to the EU economy and the Euro as a whole.

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The value of the euro fell to its lowest level in years this week, hitting $1.19 a 15% fall from May and the lowest level since 2005, In response European stocks fell sharply amid uneasiness about whether the region is on the verge of a new economic and financial crisis.

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2014 saw a number of geopolitical developments that spooked the markets. Generally negative, they created uncertainty and increased risk for investors and consumers alike, not always in metals but sometimes in stock markets that then impacted investor sentiment in metals and other commodities.

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Think the Ukraine-Russia situation, ISIS in Iraq, tension between China and Japan in the South China seas, the Ebola epidemic and China’s falling property market. What could 2015 hold? One potential source of instability is back to our old friend Europe.

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Read the first part of this post here.  Would the US, Britain, or Japan change policy at the request of foreign powers because the foreign powers were, relatively, not doing as well? I don’t think so, especially if that meant lower support for exporters and industry, stoking inflation, and boosting internal consumption when the economy […]

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