Greek Bank Closures & Capital Controls; Puerto Rico Heads Towards Default

Greece has closed its banks and instituted capital controls. The measures will remain in effect until at least July 6th, the day after a popular referendum on European bailout aid is due to take place.

Rather than agree to further austerity measures in exchange for an extension of financial aid from its international creditors, Prime Minister Alexis Tsipras surprised markets by putting the decision to a popular vote. Greece’s current bailout program expires tomorrow, when a 1.6 billion euro payment to the International Monetary Fund also comes due.

Stock markets across the globe fell on the news, and gold rose about 0.7%.

Bloomberg reports that Greece’s capital controls include:

Greek citizens have been lining up in staggering numbers to withdraw what little savings they can. The situation is reminiscent of the financial crisis in Cyprus two years ago, however, Greece’s situation is much different. As Gabriel Sterne of Oxford Economics put it:

The key point is that Cyprus’s were part of a cruel solution, while Greece’s would be part of a failure to agree on any sensible solution… Capital controls in Greece are failure epitomized.”

Others compare the Greek situation to Argentina in 2002, when the South American country defaulted on $95 billion of debt. Ultimately, trust in the government collapsed when Argentina was forced to convert dollar-denominated deposits to pesos, slicing the value of those deposits by more than 66%.

Athanasios Orphanides, a former governor of Cyprus’s central bank and a professor at MIT, told Bloomberg:

Just like the South American nation before it dropped its peg, Greece doesn’t have the money it needs to spend and lacks the ability to print euros — making capital controls all but useless…”

Peter Schiff has pointed out this predicament before – unless Greece abandons the euro and returns to a form of its old drachma currency, the Greek bank can’t print money to avert financial disaster. However, if it does drop the euro and convert to the drachma, Greek savings could experience terrible loss of value, much like Argentina.

While Europe wonders if the Greek crisis will be the beginning of the end of the euro currency, news has simultaneously hit that Puerto Rico cannot pay back about $72 billion in debt. As a United States territory, a Puerto Rico debt default could wreak havoc in the US municipal bond market.

The New York Times reports:

Puerto Rico’s bonds have a face value roughly eight times that of Detroit’s bonds. Its call for debt relief on such a vast scale could raise borrowing costs for other local governments as investors become more wary of lending.

“Perhaps more important, much of Puerto Rico’s debt is widely held by individual investors on the United States mainland, in mutual funds or other investment accounts, and they may not be aware of it.

“Puerto Rico, as a commonwealth, does not have the option of bankruptcy. A default on its debts would most likely leave the island, its creditors and its residents in a legal and financial limbo that, like the debt crisis in Greece, could take years to sort out.”

If Puerto Rico’s debt problems are the beginning of a Greek-like financial crisis, Puerto Ricans and US residents in the country would be wise to start buying physical gold and silver to protect their savings. A surge in Greek gold-buying at the beginning of the year suggests that some Greek citizens were prepared for the current crisis. However, the majority of Greeks will be forced to watch their savings held hostage as the financial future of their country is determined in the next week.

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