Central Banks Ready Response To A Greek Election Shock
The major powers’ central banks have prepared measures to head off disaster in the financial markets after Sunday’s Greek election by providing liquidity and preventing a credit squeeze, G20 officials told Reuters Thursday.
A senior American official cautioned that the Greek election will not provide “the definitive signal on what happens next” in the euro zone debt crisis.
But if severe market strains emerge after an unusual confluence of three elections this weekend – there are important votes in Egypt and France as well – central bankers are on standby to ensure enough cash is flowing through the financial system.
“The central banks are preparing for coordinated action to provide liquidity,” said a senior G20 aide familiar with discussions among international financial diplomats. His statement was confirmed by several other G20 officials.
Wall Street stocks jumped sharply on the news, with the S&P 500 and theDow Industrials both up more than 1 percent. The euro added to gains and U.S. government debt prices fell, boosting yields.
Separately on Thursday, British Chancellor of the Exchequer George Osborne said the government and the Bank of England will act together with new monetary policy tools to tackle tightening credit and financial market conditions triggered by the euro zone crisis.
A move to boost liquidity by central banks could mark a dramatic backdrop to the G20 summit of world leaders, who will gather in Los Cabos, Mexico, on Monday and Tuesday, with Europe’s escalating crisis topping the agenda.
Leaders will be accompanied by finance ministers playing an advisory role. The ministers, who usually keep a low profile at these summits, have scheduled a working dinner on Monday and lunch on Tuesday.
Depending on the severity of the market response, an emergency meeting of ministers from the Group of Seven developed nations could be held on Monday or Tuesday in Los Cabos, with central bankers joining by phone, a second G20 official told Reuters.
Currency swap lines already are in place, and they can be drawn upon to ensure there are enough dollars available if global investors rush into the safety of U.S. assets. Central banks also can hold extra auctions to flood banks with short-term cash via repurchase agreements.
Currency intervention also is possible, though less likely to be sanctioned by the G7. Japan and Switzerland might intervene to weaken their currencies if a rush to safe-haven assets pushes up the yen and the Swiss franc.
Japan already has indicated to its G7 partners concerns about yen strength and it had considered acting earlier this month, several informed sources said.
The International Monetary Fund took the unusual step Thursday of sanctioning currency intervention for Japan to counter stresses from Europe, noting its currency is “moderately overvalued.”
As for Switzerland, it has drawn a line in the sand at 1.20 francs to the euro. Swiss National Bank Chairman Thomas Jordan and the country’s finance minister, Eveline Widmer-Schlumpf, on Thursday both threatened capital controls to prevent the franc soaring if Europe’s crisis deepens.