Thanks to all the media hype about the Greek elections, many people around the world were beguiled into believing that this small country had the power to decide the fate of the euro itself as well as the financial state of the entire world. But, in reality, nothing could be further from the truth. This tiny county has the thirty-fifth largest economy in the world and an exit from the Eurozone would not have caused a global meltdown. However, a default on its debt would have certainly caused some large losses for bond holders of Greek sovereign debt. Nevertheless the narrow margin win by the New Democracy party gave the some relief to the Eurozone. In response to the news, there was brief rally that did not last long as investors and traders realised that the Greek election results have little to do with resolving the underlying problems in the Eurozone. Greece is merely a small part of a much broader crisis whose epicentre has now moved to Spain and Italy.
Many voters found themselves in a total quandary as they wondered who to vote for after years of being lied to by their political leaders. It is like having to choose the best of a bad bunch of grapes. But, for now, the leaders of the Eurozone have some breathing space as the Greek people voted for pro-austerity party New Democracy.
The conservative New Democracy (ND) which supports the current terms of the bailout package agreed to between Greece and the so-called “Troika” of the European Union (EU), International Monetary Fund (IMF) and the European Central Bank (ECB) eked out a victory in Greece’s parliamentary elections on Sunday, edging out the leftist Syriza party, which is strongly opposed to the austerity measures imposed as part of the country’s bailout. The margin was less than 3 points.
In the meantime Spanish bond yields have risen to a euro-era record, well north of 7% after the Eurozone partners agreed to extend up to 100 billion euros ($125 billion) to rescue Spain’s banking sector that crashed in 2008. While the bailout eased concerns about the risk of a total collapse it didn't restore any confidence from markets as the yield on Spain's 10-year government bond jumped sharply by 25 bps to 7.13%, for the first time ever and thus increasing the risks that the Spanish government will need a full bailout of 350-450 billion euros rather than just up to 100 billion euros for its banks.
The Bank of Spain reported that bad loans as a percentage of total Spanish lending rose to 8.72% in April from 8.37% in March, the highest since 1994.
Moody's recently downgraded Spain to one notch above junk status. Moody's also downgraded the credit rating of Cyprus to Ba3 from Ba1 and is on review for further downgrade. It noted that its’ banking sector is heavily exposed to Greece.
Last week, another rating agency, Fitch slashed Spain's sovereign credit rating by three notches to BBB. Fitch rating managing director Ed Parker warned that Spain could miss the deficit by a "substantial margin" next year. Parker also said that if they see "further worsening or more general intensification of the Eurozone crisis, then further negative news could lead to further negative rating action."
In the meantime, Spain's Prime Minister Mariano Rajoy told reporters that the deal ensured "the credibility of the euro" and insisted that rather than buckling to pressure for the rescue, he had sought it all along.
His government has vowed to slash Spain's public deficit from 8.9% of total economic output last year to just 5.3% this year and 3.0% in 2013.
But, economists say Spain faces a daunting task achieving those goals in a period of recession, which reduces tax income, and with unemployment at 25% which raises welfare costs.
A US independent rating agency, Egan-Jones warned that Spain and Italy could need a full-scale bailout within six months. Founding Partner and President Sean Egan said that "it makes little sense to separate the banks' credit quality from the governments' credit quality". He predicted that Spain will be "back at the table" and ask for more than the EUR 100b they sought.
Last Thursday, U.K. Chancellor, George Osborne, said at the annual Mansion House address that the Bank of England will activate an emergency lending program. The UK Treasury and the central bank have agreed to launch a scheme to stimulate bank lending by offering to loan banks funds at below market rates for a period of perhaps 3 to 4 years. The BOE will also activate the Extended Collateral Term Repo facility which provides 6-month liquidity against a wide range of collateral. Governor, Mervyn King, stated that "the other effect of the euro area crisis has been to create a large black cloud of uncertainty hanging over not only the euro area but our economy too, and indeed the world economy as a whole… With signs of a deterioration in the outlook, especially in world markets, the case for a further monetary easing is growing". His statement to suggest that further asset purchases would probably be announced at the upcoming BOE meetings.
As mainstream economists, central banks, politicians, or bureaucrats fail to identify the root cause of the current financial and economic crisis and as the moronic masses continue to have faith in our current leaders, the prudent few, who see how today's fiat money regime is causing seriously harmful economic problems that will ultimately end in a depression on a grand scale, will take the appropriate action to protect themselves.
While weak economic data plagues headlines in Europe and the U.S. especially, and as our political and financial leaders find new controls to ring fence individuals in an attempt to stem potential capital flight, investors who see this, understand that gold and silver offer the only glimmer of hope these days.
When our G-20 leaders meet in Mexico don't expect much. But, be sure that this group of leaders will find ways to finance governments and banks at the cost of the individual tax payer. No one really knows what is going to happen in the next five years, but by judging the events of the last five years, things can only get worse. It is therefore necessary to add precious metals to your investment portfolio- especially gold and silver.
Gold prices are trading above the 50 day MA which is a positive sign. However, prices will need to break through $1625 an ounce to confirm that this up trend has resumed.
About the author
David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.
His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.