As Greece Prepares To Vote, the World Battens Down Hatches
Central banks from Tokyo to London checked their ammunition on Friday in preparation for any turmoil from Greece’s election on Sunday.
Officials from the Group of 20 nations, whose leaders are meeting in Mexico next week, say numerous central banks are preparing to take steps to stabilize financial markets — if needed — by providing liquidity and preventing any credit squeeze.
European Council President Herman Van Rompuy convened a conference call on Friday afternoon with the leaders of Germany, France, Italy and Britain, officially to discuss preparations for the G-20 summit, expected to be dominated by the euro zone debt crisis.
Depending on the depth of any turmoil, an emergency meeting of ministers from the Group of Seven developed nations could be held on Monday or Tuesday during the summit in Los Cabos, Mexico, sources said.
ECB President Mario Draghi said his bank was ready to step in and fund any viable euro zone bank that gets in trouble, and painted a picture of a deteriorating economy with no inflation danger — conditions for monetary easing.
“There are serious downside risks here,” said Draghi, two days before a Greek vote that could set Athens on a path out of the euro zone and stoke turmoil in financial markets. “This risk has to do mostly with the heightened uncertainty.”
Japan’s top financial diplomat Takehiko Nakao warned that authorities in Tokyo would respond to unwelcome currency moves as appropriate, a clear threat of intervention if investors seeking safety push the yen too high.
The Bank of England followed up on Thursday’s joint announcement with the government of a 100 billion pound ($155 billion) offer of loans to banks by saying it will start next week with a charge of just 0.75 percent.
G-20 governments are also indicating they will use the June 18-19 summit in Los Cabos, Mexico, to again demand Europe pursue fresh measures.
It’s the fourth consecutive such meeting at which Europe’s strains have topped the agenda and it comes seven months after discussions in Cannes, France, were dominated by the prospect that Greece could be forced from the euro.
Canadian Finance Minister James Flaherty said on June 13 that “a disruptive moment” could occur if Greeks back anti-bailout parties, which may end up costing the country membership in the euro.
US Treasury Secretary Timothy F. Geithner said the same day that European leaders “recognize they’re going to have to do a bunch more.”
“Countries outside of Europe have been consistent in calling for bolder, less incremental measures to stem the crisis,” said Daniel Price, who organized the first G-20 summit for President George W. Bush in 2008 and is now managing director of Rock Creek Global Advisors, a Washington-based consultancy.
“They are losing patience with the apparent inability of Europe to implement reforms all recognize as necessary.”
Japan’s Prime Minister Yoshihiko Noda said Japan will encourage European leaders to quickly take steps to strengthen its financial system.
A bailout for Spain’s banks failed to ease concerns that Europe’s sovereign debt crisis is deteriorating.
“It is important for the G-20 leaders to send a strong political message to stabilize financial markets,” Noda said.
Eyes on Greece
The focal point for all is Sunday’s repeat general election in Greece, a knife-edge race that could be won by parties vowing to tear up the harsh economic terms that the European Union and International Monetary Fund imposed as conditions of a bailout for the near-bankrupt state.
Such an outcome could drive Greece into default and possibly out of the euro zone, a prospect that could undermine faith in the currency bloc and add to pressure on the finances of bigger economies such as Italy and Spain.
Madrid’s borrowing costs rose above 7 percent on Thursday, a level that is widely considered unsustainable. They fell slightly on Friday and European shares and the euro gained on expectations of global central bank response.
“At best, we are going to have a situation that is extremely serious on Monday,” Swedish Finance Minister Anders Borg told journalists. “In all likelihood, whatever the outcome, we are going to have a government which is going to find it hard to live up to the agreements they [the Greeks] have signed up to.”