Tuesday, October 4, 2011

The Condition of Greece's Debt and its Effect on Dollar and Gold

Investors hunt for safe havens, especially U.S. Treasury and gold to avoid risky assets after Greece has been getting closer to default on its debts.
If using credit-default swaps, it costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greece’s debt for five years, up from $5.5 million in advance on Sept. 9, according to CMA.

Athens authorities said the deficit target in 2011 would have missed so that Greece requires additional funds which is bigger than expected. Greek 2011 deficit has been estimated to reach 8.5% to Gross Domestic Product (GDP). This figure is much higher than the previous target of 7.6% for 2011 as well as a requirement of lenders.

On the other hand, Greece budget is also increasingly severe because in 2012 the deficit should be reduced even lower to a level of 6.8% of GDP. This figure is still above the lenders target at 6.5% deficit in Greece next year.

Angela Merkel -German Chancellor- said that she won’t let Greece go into “uncontrolled insolvency” as politicians try to limit contagion to other euro members.

If later Greeks really experienced default, likely, EU policy makers will strive Greece default to be 'controlled default' or 'orderly default'. That is, Greece creditors would be forced to take a 50% discount on their investment. The goal is the banking sector in Europe will be able to deal with.

Serious problems that occurred in Europe makes the U.S. dollar rose against most major currencies including the euro. U.S. dollar index rose 0.51% to as low as 79.47 from 79.30 previously. Against the euro, the dollar strengthened to a level of U.S. $ 1.3354 from U.S. $ 1.3390 per euro.

Gold futures also rose for a second session as market players worried about the condition of Greece. That way, the demand for gold and other metals also surged. Supposedly, Tuesday (10/04/2011) is the day of approval of the bailout worth 8 billion euros (equivalent to 10.7 million U.S. dollars) to Greece. However, it was postponed until mid-October. Therefore the potential for Greece olderly default is feared will rise. With this condition, the possibility of physical gold demand will increase in coming days.

In the aftermath of the recent selloff, the gold price position is further than before. And, current conditions is a positive signal (bullish) for the price in the future.

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