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The Greek stock market is down over 36% year to date; the risk of global contagion in the event of a Greek exit is very real. Ordinarily such a crisis would require a massive coordinated effort from global stakeholders, perhaps directed by the IMF or some other pan-national financial body. But not in this case; the rhetoric is nationally-based and biased without unity of purpose across finance ministries. Recent official soundings from the UK and German governments saying that exposure to Greece is limited only underscores the depth of denial, ignorance and lack of consensus that exists within the euro area. A Greek exit from the euro would profoundly weaken the euro experiment and create a dangerous precedent for all future crises in the region.

The European economy is the largest middle class economy in the world. With over 400 million relatively affluent consumers it represents a massive portion of the net global economy and as such a breakup of part of it would be felt across the world in credit spreads and capital decisions for years to come. This would not have been because of Greek exit, but rather because of the inability of the authorities to manage the crisis as risks initially built up, then as bail outs were designed and implemented and then as these efforts surely failed.

We are witnesses to an epic failure of planning, statecraft and social justice. Regardless of where your politics lie, these elements are critical for a modern globally connected economy to function.

Sadly, the geopolitical backdrop is one of suspicion and hostility in the form of a festering proxy war between western and Russian interests in Ukraine and regional crisis and humanitarian catastrophe in the middle east as Syria and Iraq descend into stateless anarchy. These factors reduce the odds of a successful solution in Greece being found in time.

The share value of Greek banks cratered up to 30% Wednesday alone, before pulling back on Thursday as fears grew that the new government may not intend to soften their stance now that they are in office.

In what is probably the worst performance for the sector on record, the four major banks – Bank of Piraeus, Alpha Bank, National Bank of Greece and Eurobank – all closed more than 25% lower. Athens stock exchange closed 6.4% lower.

It marks an acceleration of the losses incurred over Monday and Tuesday in the immediate aftermath of the Syriza victory. From London’s Telegraph.

Greece’s banks have lost almost 40pc of their value in the three days since Syriza ascended to power in Sunday’s election as the dual threats of a bank run and the loss of support from the European Central Bank threaten a liquidity squeeze.

Forbes list five main causes for the collapse:

1. Deposit flight has accelerated.
2. ECB liquidity could be cut off.
3. Potential public and private debt restructuring.
4. Low profitability.
5. Reliance on deferred tax assets – Forbes explains it as an over-reliance by Greek banks on liquidity from the state.

Greek banks are hemorrhaging deposits. The telegraph reports, “Banks also risk a repeat of the deposit flight seen in 2012. Up to €8bn of private sector deposits has been pulled out of Greek banks since November, according to Moody’s”, adding that bank deposits have fallen 5% in the last two months.

The Financial Times paints an even more dramatic picture of bank runs and capital flight.

The real danger is that the Greeks themselves lose confidence. There are tentative signs that money is again being sent abroad, as it was in mid-2012. Nikolaos Panigirtzoglou at JPMorgan points out that €350m was sent from Greece to Luxembourg money funds since the start of last week. Extrapolating to all cash flight, he estimates as much as a 10th of Greek deposits may have left already this year. If a Greek bank panic develops it will strengthen the German hand, and make negotiations that much harder.

In the event of any or all of these possibilities, gold and silver bullion will perform well as a currency of last resort.

Greek coin and bullion dealers with whom GoldCore spoke, confirmed an increase in demand for gold coins and bars in recent weeks and since the election.

GoldCore have Greek clients both in Greece and living in the UK and throughout the world. We have seen a definite upsurge in interest, inquiries and demand since the election last Sunday.

Concerns about bank holidays and also a return to the drachma have returned and Greeks are looking for ways to prevent further destruction of their wealth.

For Greeks, Storage in Switzerland remains a favoured way of owning gold.

The comprehensive guide to bail-ins: Protecting Your Savings in the Coming Bail-in Era

PRICE UPDATE

Today’s AM fix was USD 1,263.50, EUR 1,114.98 and GBP 837.42 per ounce.
Yesterday’s AM fix was USD 1.275.50, EUR 1,129.36 and GBP 842.25 per ounce.

Gold and silver both fell yesterday. Gold dropped 2.13% or $27.30, closing at $1,257.60/oz. Silver fell 5.78% or $1.04 and closed at $16.95/oz.

In a somewhat stunning admission of the truth in central planning (that the Swiss just experienced first hand - and perhaps Venezuela has been experiencing for years), The Philly Fed's Charles Plosser explains the following...

"It may work out just fine, but there’s a risk to that strategy, and the risk is that we wait until the point where markets force us to raise rates and then we have to react quickly and aggressively. I believe that if we wait too long, then we run the risk of falling very far behind the curve or disrupting the economy by rapid rate increases.

...

The history is that monetary policy is not ultimately a very effective tool at solving real economic structural problems. It can try for a while but the problem then is that it’s only temporarily effective, and when you can’t do it anymore you get the explosion yesterday in the Swiss market.

One of the things I’ve tried to argue is look, if we believe that monetary policy is doing what we say it’s doing and depressing real interest rates and goosing the economy and we’re in some sense distorting what might be the normal market outcomes at some point, we’re going to have to stop doing it. At some point the pressure is going to be too great. The market forces are going to overwhelm us. We’re not going to be able to hold the line anymore. And then you get that rapid snapback in premiums as the market realizes that central banks can’t do this forever. And that’s going to cause volatility and disruption.

...I think the jury is still out on the costs. Because the cost I was worried about was the longer-term cost of unraveling all of this. So maybe I was right, maybe I was wrong. That remains to be seen.

I do worry about the longer-term implications for the institution. Part of my criticism has been that we have pushed the boundaries into fiscal rather than monetary policy. That has brought us praise and opprobrium. Perhaps justifiably on both counts. I do wonder as I look down the road five or 10 years, how will that shape the institution? What happens to our independence? What happens to our ability to do things effectively? Given all that we’ve done — maybe it was all for the best, but even if it was — are there going to be longer-term ramifications that we may end up regretting later?"

*  *  *

So - what happens when the markets realize this?

Source: The Washington Post