Who is going to pay for Greece?

Presently, Greece has no money to repay the debt, but the share of gold in its reserve is still 66%; that means that, theoretically, about 47 tons of gold can be sold in order to pay IMF 1.5 bln until the end of the month.
The painful points of the previous week made a smooth transfer of problems to this week. Greece is approaching the final straight. The general meaning of the FOMC statement is the following: the Federal Reserve does not know the dates of rate increase. The dollar's first response to the FOMC meeting was "reflexively" negative, and, as the consequences showed, dollar sales were of quite short duration. It is still too early for the dollar rally to end. The market sets all reference points second-guessing general phrases regarding "economic data" as it pleases. There is no certainty that the situation will meet to the requirements by the July or September meeting.

The speech made by perpetually vague Yellen was founded on rates and unemployment. Unexpectedly, the labor market statistics caused evident apprehension in FRS. Is it possible that opening of understanding is coming and qualitative components do not suit officials any more? Up to date, the market has been saturated and we shouldn't wait for an active growth (400-500 thousand of new jobs monthly), since a large part of qualified capable workers have already been employed, although, qualitatively, the situation on the market is quite problematic. That is all valid if they don't consider those doubts as a new reason for raising rates.

The meeting in July was planned for 28-29, and GDP data (first reading) will be published on the 30th, and it is absolutely impossible for the Federal Reserve to decide to raise the rate one day before the publication of such important information. The closest expectations are inevitably shifted towards September. In order for FRS to take confident actions, it is too little to have only positive statistics; and one can't build any trading strategy on guesses. We can only guess that, in order to raise rates, it is mandatory that the dollar rate against the main currencies be 4-6% higher than the current rate by the middle of September.

As it was expected, the Greek issue was not resolved on Monday; a "new" hope for settling it came - the government offered a new plan for avoiding default (reduction of expenditures, taxes for the rich, raise of VAT, and a few other trifles; however, no reduction of social programs will be made. The plan has not been assessed completely yet, the European Group has taken a time-out until, approximately, Thursday. Delighted, ECB again (for the third time during the week!) increased the volume of ELA financing for Greek banks, trying to to save them from the withdrawal of deposits caused by panic. The was some information that in the midst of all this, creditors are ready to prolong the aid program for another half a year and pour around 18 bln euros into the Greek economy with the possibility of partial restructuring of the debt; however, it has not been confirmed yet. IMF is not planning to participate in this project, the agreement has been discussed only with the European Group and ECB.

Presently, Greece has no money to repay the debt, but the share of gold in its reserve is still 66%; that means that, theoretically, about 47 tons of gold can be sold in order to pay IMF 1,5 bln until the end of the month. It will not be very profitable in the long term, since in case of default and pull out of the EU, gold can be very helpful as a security for the new drachma. Here is the real negative scenario: "X" time has been planned for June 30, the program will stop automatically after that date, and Greece will not receive the remaining 7,2 bln. euros. If IMF does not receive the new part of the IMF loan and notifies European Financial Stability Facility (EFSF) of that, it will mean a cross default on obligations. And here arises a question - so what's next? The time has come to recall the outline of the situation by points:

  1. No one wants to recognize that European governments and IMF made a mistake in 2010, when they decided to rescue Greece's private creditors.
  2. Financing was designed to protect not Greece but rather German and French banks that had, in due course, purchased too large volume of empty Greek state bonds.
  3. The factor that generated the current situation was the political program that assumed that Eurozone couldn't allow a default.
  4. A new blast on the Greece's future was restructurization that was hastily developed in 2012.
  5. Greeks took official loans and only then realized that defaulting on private creditors loans is not as bad as defaulting on the EU.
  6. Greece's private creditors have received their payments for 5 years, and their loans have been gradually replaced with EU and IMF loans.

Despite the fact that in the midst of the Greek series euro is quite stable, the present-day idea that the EU will be better off without Greece is just an advertisement myth. Even if we take into consideration that the private segment practically has no Greek debts and banks have prepared plans for this occasion, no one knows how the first signal of the demise of the much praised European Union will tell on its global participants. Let's remind ourselves that 60% of volume regarding ELA program are contributed by Germany and France. Default will mean not only huge losses for Germany and France, it will also turn negatively on Merkel's reputation, not even speaking about the fact that Greece will move closer to Russia.

In case of new agreements, a dispute will arise with regard to who is going to give the country more money: ECB (by selling short-term bills to Greek banks) or by selling 2010 Greek loans (1.9 bln euros) or through loans for recapitalization (10.9 bln euros). Dollar grew stronger in the course of two previous days especially against euro, which fell under the pressure of comments made by Goldman Sachs currency strategists last night ("the consequences of the Greek problem push euro to parity") and good Chinese statistics. Large capital has been cautiously purchasing dollars in the mid-term perspective. EUR expanded its range to 1.1450, the following decline stopped at 1.1230/50 levels. Large sales are seen at 1.1205, a penetration will cause an avalanche of stops. The main mood of movement is still unclear; however, it will be moderately negative until Thursday.

Author: Navsher Bartash,
ForexChief Currency strategist