The Coming Greek Default And The Impact On Gold, Stocks And Bonds

Includes: FXE
by: John Lindauer

<< Back to Part I

Part I of this series explained why Greece and one or more other countries will soon be defaulting -- on all, or part of their sovereign debt-- and may leave the 17 country Euro block while continuing in the 27 country European Economic Community (the EEC), Europe’s common market. They will be forced to default when they finally become unable to borrow more euros from arms-length lenders to cover their budgetary excesses - because they have no hope of ever paying them back.

Before Greece and the others pull out there will be desperate efforts by the governments of Germany and France, by the IMF, and by the EEC’s elite to “save” them from defaulting. They will do so for different reasons: the EEC to increase the powers of its elite, the governments to avoid having to bail out their own banks which made loans knowing they could not be repaid, and the IMF to save itself.

A handful of large European banks made most of the loans which will default. Their governments don’t want the banks to fail or need bailouts (and they don’t want their politically connected executives to lose their jobs and stop making campaign contributions,) so they are playing for time while the banks build up their reserves and unload the debt on gullible hedge funds and investors such as MF Global.

The IMF will try to raise money to save them as part of its bureaucracies’ efforts to find a meaningful role for the IMF in a world that no longer needs it, because exchange rates between currencies are now set in markets instead of being fixed by bureaucrats. Expect the IMF to approach the White House, China, the Federal Reserve, and any other country or organization with leaders the IMF thinks might be naïve enough to give the IMF money it can lend (read permanently give away) to Greece and others to temporarily stave off their inevitable defaults.

The EEC’s elite want more power: they want to run the United States of Europe. They too will advocate “saving” Greece and the other countries from default as part of the EEC’s continuing efforts to increase the powers of its unelected elite. The EEC’s solution will be for Greece and all the other countries in the common market to give the EEC’s elite control over the budgets and spending of the individual countries “to insure they are all fiscally responsible.”

The first step in the EEC’s effort to tighten Europe’s political bonds under the enlightened leadership of its bureaucrats will take the form of the EEC proposing some form of “Euro Bonds” for banks and other arms-length investors to buy.

The EEC will propose that it issue the bonds on behalf of all the euro users and parcel out the money as the EEC elite see fit. The bonds would be guaranteed by all 17 countries using the euro. In other words, the EEC’s bureaucrats will dole out the borrowed monies to countries that do what the bureaucrats tell them to do. In essence, the EEC plan is for the Germans to guarantee to pay the bonds when they come due so the other 16 counties can continue to borrow and spend-- if they tax and spend as the EEC bureaucrats require.

That’s a non-starter - because the Germans will never agree to tax themselves so other countries can continue their excessive spending as the unelected EEC bureaucrats see fit. What may be taken more seriously, at least temporarily until it fails, is some form of limited guarantees from all 17 countries to rope in the Germans and use Germany’s good credit to get some of the borrowing of the others done at lower rates of interest. For example, a “euro bond” backed by all the countries (read Germany) that covers no more, initially, than 60% of each country's GNP.

But even limited guarantees will, at best, merely delay the inevitable German refusal to be on the hook for more and more money so other countries can continue excessive spending. Sooner or later, Greece and one or more of the other euro counties will be forced to default. Plan for sooner.

When the defaults occur, t he prices of stocks, bonds, and gold will then be determined by whether or not Greece and the other defaulting countries abandon the euro and whether or not they use that event to implement major reforms that could fundamentally alter the economies of Europe, and the profitability of the banks and businesses in each of its countries.

Two things are virtually certain-- whether Greece and the others stay with the euro or not – one is that the politicians of some of the defaulting countries will use the cover of the ensuing chaos to pass laws to reorganize their economies. The other is that there will be great opportunities for traders and investors to either take big losses and miss huge profit opportunities, or to get in on the ground floor of the all-new profit opportunities that will arise in the newly reorganized European economy. In other words, it will be an entirely new ball game with new rules. And the winners may not be who you expect.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.