‘Crunch Time’ in Greek Debt Talks

Markets are caught between joy and disconsolation at the moment. On the one hand, they know that central banks are committing to ever-greater money creation efforts in order to keep the present economic show on the road – and Mr Market loves nothing more than free money. But as long as the shadow of a disorderly Greek default persists – along with the possibility that more peripheral eurozone nations will also be forced into a similar position – bulls can’t rest easy just yet.

As Reuters reports, Greek political leaders face “crunch talks” today over a rescue package that must be approved by eurozone governments, the European Central Bank and the International Monetary Fund before February 15, “in order to complete legal procedures for a bond swap deal for a March 20 bond redemption… Citigroup expects Greece to avoid disorderly default but raised the chances of a Greek euro area exit to 50 percent over the next 18 months, up from 25-30 percent.”

If – as seems likely – they do arrive at a face-saving deal for Greece, this will provide further impetus for gains in equities and commodities. This should also encourage gains in the euro at the dollar’s expense. Gold and silver should be supported by a weakening dollar, but gold may suffer in relation to other precious metals on account of its greater safe haven status. Hedge funds will be looking to put money to work in “risk” assets – which should mean greater gains in metals with industrial utility.

Thus a falling gold/silver price ratio looks likely over the coming months, with sentiment improving on the US economy and the European Central Bank becoming ever-more Anglo-Saxon in its approach to monetary policy. Easy money policies from the ECB make it far more likely that the eurozone will hold together over the short and medium term – at the expense of savers and those citizens of northern European countries such as the Netherlands and Germany who would be enjoying far greater purchasing power if they still had their own currencies.

We await the results of today’s Greek talks with interest.