Central banks braced for post-election Greek fallout

CENTRAL BANKS across the world are girding themselves for a co-ordinated response in the event of a credit shock following elections in Greece on Sunday. The outcome of the Greek vote could raise the risk of the country’s exit from the euro zone.

Markets rose yesterday and Spain’s cost of borrowing fell as investors saw that central banks from London to Tokyo are ready to take action to provide liquidity to stabilise financial markets, whatever the outcome on Sunday may be. Investors are cautiously hoping for a coalition of the traditional parties, which could have a positive impact on markets and lead to a rapid rebound.

If there is no resolution in Greece, then market uncertainty is likely to reign into next week, and will be one of the main topics of discussion at a host of high-level meetings that are scheduled to take place.

On Monday, G20 leaders will gather in Mexico; the US Federal Reserve’s rate setting committee will meet for two days from Tuesday; euro zone finance ministers meet on Thursday; and a mini-summit of German, French, Italian and Spanish leaders is scheduled for Friday in Rome.

Announcements from any one of these events could move markets sharply, while 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 G20 summit in Los Cabos.

In Frankfurt, the European Central Bank (ECB) yesterday hinted at a further interest rate cut, which would bring the main rate down to just 0.75 per cent, as central bank officials said that policy makers have overcome key concerns about taking the benchmark interest rate below 1 per cent and ECB president Mario Draghi said there is “no inflation risk in any euro-area country”.

Mr Draghi also indicated that his bank was ready to step in and fund any viable euro zone bank that gets into trouble.

In London, Mervyn King, governor of the Bank of England signalled a change in the bank’s outlook when he opened the door to further economic stimulus, including additional quantitative easing (QE), liquidity assistance for banks and a credit easing scheme to encourage extra lending to UK households and businesses.

Michael Saunders, an analyst with Citi in London, said that QE is likely to resume in July with a first step of £75 billion (€ 92.53 billion) “unless economic prospects improve markedly”.

However, he noted that this “may not immediately be enough to fully insulate the UK economy from the EMU crisis, as well as to overcome the domestic drags from high household debt and tight fiscal policy”.

In the United States, the treasury under secretary for international affairs, Lael Brainard, offered assurance that Washington has a “tool kit” and stood ready to preserve market confidence.

Here in Dublin, brokers are bracing themselves for the outcome of Sunday’s vote.

“If there’s a successful conclusion and a new government elected, then it might take that fear element out of markets for a while, and it could be a busy day on Monday,” said one. – (Additional reporting Bloomberg/Reuters)