A couple of days ago I found myself talking to a Greek guy at a party. “How bad is it over there?,” I asked after a few minutes’ banter, “Are people starting to get nervous about their savings yet?’
He just shook his head. “Oh, it’s way past that,” he told me. “Most of my friends have been draining their accounts for months!”
He leaned in. “You know, there is so much money leaving the country right now that even the banks are running scared.”
And then he told me of about a scam set up by the Greek banks. One that involves desperate bank chiefs and the European Central Bank. And which could have serious implications for investors right across Europe.
Today I’d like to explain a bit about what’s happening in Greece. And how we could end up benefiting from the coming catastrophe.
The massive scam in Greek banking
First, let’s just be clear, it’s the Greek government that’s in trouble, not Greek individuals. It’s the government that borrowed recklessly – it’s the government that can’t raise enough tax to pay the bills and it’s the government pleading with the ECB and IMF for their political and economic lives.
Many Greek individuals have never been richer. Greece has the largest privately owned shipping fleet in the world, and tourism has made many a Greek millionaire over the last few decades.
According to my friend, a lot of this wealth is on the move. And so it should be.
The idea that every euro is of equal value is now in question. There is simply no way that a Greek euro should be able to buy exactly the same amount of gold as a German one.
And the bond markets agree. Right now the markets are saying that the Greek government may well default on its debt. And if it does, it will surely bring down the Greek banks – the largest holders of Greek government bonds. And if the banks go down – then what happens to depositors’ cash?
Now, here’s the thing. If a Greek euro is worth exactly the same as a German one, then why on earth would you want to hold Greek euros in a Greek bank? That’s just taking on needless risk. After all, you’ll still get the same lousy interest wherever you keep the cash.
So wealthy Greeks are setting up euro accounts in Switzerland, or Scandanvia – frankly anywhere other than Greece. And Greek banks are scrambling to replace these deposits by borrowing from the European Central Bank. It’s like a money merry-go-round. Only now it’s the ECB that’s got the risk of the Greek bank defaults – not the wealthy Greeks.
The only thing that’s keeping the scam going (that every euro is of equal value, regardless of which country issues it) is the political will for the ECB to take on the risk of the Greek banks.
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What happens next?
No scam carries on indefinitely. At some point the fund flows become too large even for the political manipulators to cope with. At some point, they will be forced to take a more authoritarian approach. That’s why I expect to see controls on the movement of capital.
This is what happened in Iceland towards the end of 2008 when cash was disappearing to the safety of overseas banks. The government passed a new law making sure that citizens couldn’t move their wealth out of the country. The law said that any capital released by its citizens must be reinvested with Icelandic financial institutions.
By then it will be too late to take cover. Any Greek worth his salt knows how this can end up.
And that’s why locals are getting a taste for a genuine, portable store of value like gold. The authoritarians can’t control the commodity markets as easily as the financial markets. And that’s especially so for physical gold.
We’ve seen European gold sales soar over recent years. I’ve got a feeling this is just the beginning. The clever guys have shifted savings into non-Greek banks and they’ve been collecting gold in case of future restrictions and/or revaluations on their money.
I’m going to be following this story closely. It’s going to be interesting to see when the politico’s finally give up on bankrolling the free flow of cash into foreign sanctuaries. Then we’re likely to see restrictions on capital movement which will be the precursor to negotiations on default.
And that can only be good news for our gold holdings.
• This article was first published in the free investment email The Right side. Sign up to The Right Side here.
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