As already stated in this blog, problems of Greece and the fear of state bankruptcy remain a burden on the metals markets for the foreseeable future, particularly for precious metals. The connecting link in this chain is the exchange rate of the euro on foreign exchange markets against the US dollar. But it was less the Greeks or even the infamous hedge fund that put the credit default swaps (CDS) markets under pressure, but politicians in Berlin. Most German officials can not cope with the requirements of solid government and are unable to solve problems adequately. The failure of the Berlin policy has put the euro and therefore the metals markets under pressure again. Also, this problem should not be resolved so quickly.
At the start of last week it looked as if the EU put together a package of measures to assist Greece after Greece took the additional savings measures, which were demanded by the EU and the ECB. At the recent press conference, ECB president Trichet praised Greece for the new budget explicitly. But the markets were disappointed by the EU finance ministers, after the chairman of the Eco-Fin Juncker told the press that there had been agreement on the technical aspects of assistance to Greece. It had been leaked, however, hereafter by EU sources that Germany had blocked more concrete statements on which the markets had been waiting. But then by mid-week, Chancellor Merkel shocked the markets with a u-turn of the German policy. She turned to stubborn and recommends Greece to take a loan assistance of the IMF. Germany would not agree to EU package of measures for Greece at the forthcoming summit of EU heads of state under any circumstances.
What are the reasons for the sea change in German politics? Ultimately, it is likely that the state election in North Rhine-Westphalia and the lack of political leadership by Chancellor Merkel as well as the crash of the FDP in the polls, after Foreign Minister Westerwelle rapidly losing popularity, which resulted in the Berlin chancellery to this u-turn. The CDU/FDP coalition in Berlin has in the few months since taking office lost so rapidly in approval that the Merkel-led CDU is threatened with the loss of power in North Rhine-Westphalia. This would also mean that the majority would be lost for the Berlin government coalition in the Bundesrat, the upper house. Aid for Greece is not popular in Germany and the mass media stir up negative sentiment strongly. For the party strategists it is the easiest way to float on this wave of sentiment, and thus, to alienate the voters, even if the unpopular support for Greece is the overall better alternative. While Greece's government under Prime Minister Papandreou explains to its own population the necessity of saving and convince them, so the government can count on broad support, Chancellor Merkel as so often lacks political leadership.
A support package for Greece does not necessarily imply or require that the money of foreign taxpayers, including the German citizens, has to flow to Greece. After all, the Papandreou government has not asked for any financial support from EU. For the financial markets, it is however important to know that Greece still has funding alternatives and is not facing bankruptcy. Requested from the EU are measures, which illustrate that EU countries support Greece, after the Government would implement the required fiscal restraint. Greece would certainly get an IMF loan, without additional restrictive fiscal measures being required. But the German Finance Minister Schaeuble has far quicker worked into the matter of his new resort than the physicist Merkel understands the laws of financial markets. As Schaeuble pointed out, the course of Greece to Washington for the IMF would send the wrong signal. It would show the world that Europe were not in a position to solve its own problems without the cooperation of the USA and China. Confidence in Europe and the euro could take longer-term damage. It would also signal to hedge funds that they had a free hand to attack the next victim. Once the sharks have tasted blood, they attacked the victims. The Asian crisis in 1997, originated in one country, but other countries were infected by the Asian contagion. Even Hong Kong, which operated a sound policy and its currency was firmly tied to the U.S. dollar in a "currency board" system, came under attack. If the EU can not agree on an aid for Greece and the country must take an IMF loan then Portugal and Spain could be the next victims. The euro is likely to remain under pressure against the U.S. dollar, and the speculation about an end to the monetary union could mount again. For the precious metals that would be first a negative scenario. Only once a flight of investors from the euro zone into gold sets-in, the price of gold in dollars might rise again despite continued euro weakness.
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