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Bailing on Bailouts
New York: September 12, 2011
By John Stephenson

Europe continues to be the focus of traders' attention with Greece 's bailout deal on increasingly shaky ground. Doubts over Athens ' ability to reign in its deficit is irking lenders and markets with the credit-default swap market pegging the probability of a Greek default at 92 percent. Fatigued from two years of fighting to contain the region's debt crisis, Germany and Holland have threatened to block further rescue payments to Greece unless the country complies to the letter with bail-out terms.

The Greek government's attempt to impose tough austerity measures has spawned rising social tensions and political turmoil while the economy continues to wither. Greek GDP is set to contract by 5 percent in 2011, rather than the 3.8% that forecasters originally assumed and unemployment remains stubbornly high. This past week, Greek taxi drivers, dentists and hospital doctors walked off the job to protest the government's austerity plans.

The Greek parliament's own watchdog recently said that the country's debt dynamic was “out of control” as public debt is set to reach 172 percent of GDP in 2012. Greece has been in a deep recession for almost two years and severe spending reductions have exacerbated Greece 's economic tailspin, which registered an annualized 7.3 percent decline in the second quarter.

Stock markets have plunged globally amid fears of an imminent Greek debt default and growing worries about the possibility of another European bank crisis. On Friday, shares in France 's largest bank plunged ten percent as investors fretted that a Greek default would quickly morph into a European banking crisis.

The abrupt resignation on Friday of European Central Bank (ECB) chief economist Juergen Stark triggered worries about policy makers' efforts to stabilize the European financial system. The ECB has taken an active role in buying more than €129 billion of Greek, Irish, Portuguese, Spanish and Italian debt. Mr. Stark has been an outspoken critic of the ECB's bond-purchase program which is a key pillar in its strategy to contain the crisis.

Germany has been taking an increasingly tough stance against Greece threatening to withhold bailout assistance if its austerity program loses momentum. With German patience at a breaking point, Germany appears ready to give up on Greece as a Greek default looks like a virtual certainty. Officials in Angela Merkel's coalition government have begun debating how to shore up German banks in the event of a Greek default.

With Europe threatening to drag the world into a second global financial crisis, the time for gold and silver's continued ascent is upon us. Last week, gold equities finally reversed a four year trend and began outperforming the metal. In this next financial crisis, European government defaults will quickly threaten the health of the European and global banking system. In this environment, paper assets will perform poorly with gold becoming the one and only safe haven asset.

Gold bugs got another reason to be bullish last week when the Swiss National Bank (SNB) moved to stem the rise of the Swiss franc by pegging it to the euro. For months, the franc has surged wrecking havoc on the small country of 7.5 million people that is reliant on exports for 50 percent of its economy. The SNB had tried in vain to lower the value of its currency by reducing interest rates and injecting francs into the market, but it finally capitulated and settled on a peg of 1.2 francs per euro.

The Swiss have been grappling with the fallout of being the world's most sought after currency. Historically, the franc has been viewed by investors as a safe haven currency, due to Switzerland 's stable political system and their careful management of the economy. But with the currency cap in place, the potential for gains from dramatic currency fluctuations has been removed and the SNB's move has dealt a blow to Switzerland 's reputation as a safe haven.

Gold and silver will shine as Europe 's woes continue to weigh on the market and weary traders flock to the precious metals whose value can not be debased by central bankers in a world gone wild with debt.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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