World Leaders Lock and Load Before Greek Election Outcome
Speculation is swirling about various countries’ and multinational organizations’ response to large-scale market dislocation following the weekend’s Greek election. Statements released by a variety of sources in recent hours include rumors of an emergency G7 meeting to manage the post-election environment, a liquidity injection deal between the Federal Reserve and the European Central Bank, and an International Monetary Fund sanction for Japanese intervention efforts. The following points highlight critical stories circulating around the markets:
- G20 Official: “Central banks are preparing for coordinated action to provide liquidity”.
- Depending on the severity of the market response following this weekend’s elections, an emergency meeting of ministers from the G7 nations could be held on Monday or Tuesday.
- From CNBC interview with a trader:
"Its speculation based on stress in the Dollar funding market," the trader said. "Liquidity is drying up, so people think the Fed and ECB will cut a deal [to inject additional funding into the markets]." The ECB had no comment.
Highlights from Bank of England Governor Mervyn King’s speech (14 June 2012):
- The case for more monetary easing is growing.
- The BOE and UK Treasury will start a new bank funding plan in the coming weeks.
- The BOEwill activate an extended collateral funding facility(repo) to meet market strains.
- European bank loss transparency is needed to end the crisis.
- Europe may need 'major' bank recapitalization.
- The Euro crisis creating 'large black cloud of uncertainty'
- The Euro crisis has hit the UK via higher bank funding costs.
- The UK economy has deteriorated since the last inflation report released in May.
- The BOE can both ease policy and lower bank funding costs.
- The banks' biggest problem is capital shortages.
- A temporary bank-funding plan is needed to counter the crisis.
- The funding plan is aimed at boosting credit in the economy.
- The BOE would lend against loans to the real economy.
- The repo facility will give banks all the liquidity they require, reducingthe need for large funding buffers.
- Finance Minister Jun Azumi: Japan is prepared to act on the Yen exchange rate if needed. (Source: CNBC)
- The IMF took the unusual step of sanctioning currency intervention for Japan to counter stresses from Europe, noting its currency is “moderately over-valued”. (Source: Reuters)
- Spokesman for Prime Minister Stephen Harper said “Canada would be ready to act” if there was further deterioration in financial markets or an external shock, but so far believes Europe can handle its own affairs. (Source: Reuters)
Institute of International Finance (IIF) Comments (14 Jun 2012):
- Greece's loan program targets should be eased.
- Greece may require more financing support.
- EU should use bailout funds for direct Spanish bank recapitalization.
- IIF urges the creation of “Eurobonds” or a debt redemption fund
- IIF backs a move towards an EU banking union, including deposit insurance
- IMF will likely to need to take a more active role in Europe.
- IMF needs to signal it is prepared to offer precautionary credit lines to Europe
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