MacroScope

Battening down the hatches

By Mike Peacock
June 15, 2012

There’s a high degree of battening down the hatches going on before the Greek election by policymakers and market in case a hurricane results.

G20 sources told us last night that the major central banks would be prepared to take coordinated action to stabilize markets if necessary –- which I guess is always the case –  the Bank of England said it would  flood Britain’s banks with more than 100 billion pounds to try and get them to lend into the real economy and we broke news that the euro zone finance ministers will hold a conference call on Sunday evening to discuss the election results – all this as the world’s leaders gather in Mexico for a G20 summit starting on Monday.
Bank of England Governor Mervyn King said the euro zone malaise was creating a broader crisis of confidence.

The central banks acted in concert after the collapse of Lehmans in 2008, pumping vast amounts of liquidity into the world economy and slashing interest rates. There is much less scope on the latter now. The biggest onus may fall on the European Central Bank which may have to act to prop up Greek banks and maybe banks in other “periphery” countries too although the structures to do so through the Greek central bank are in place and functioning daily. In extremis, we can expect Japan and Switzerland to act to keep a cap on their currencies too. As a euro zone official said last night, a bank run might not even be that visible and start on Sunday night over the internet rather than with queues of people outside their local bank on Monday morning.

But there’s probably a greater likelihood that markets won’t melt down on Monday. A startlingly strong victory for the anti-bailout SYRIZA would cause serious tremors but far more likely is an inconclusive result which leads to days of horse-trading over the formation of a government. And there’s also a strong chance that pro-bailout New Democracy comes first and claims the 50-parliamentary-seat bonus. That would put it in pole position to form the next government, an outcome that could see markets rally strongly and take pressure off Italian and Spanish borrowing costs. Whatever the result, it’s hard to see a durable, stable government being formed so if there is any relief, it could prove to be short-lived.

The odds of dramatic coordinated global action on Monday are probably fairly long and will clearly be dictated by events. However, it is also clear that the prospect of more measured action – as from the Bank of England – is increasingly likely. A Federal Reserve policy meeting next week will have markets travelling in hope though they may arrive with disappointment.

Today, we have ECB chief Mario Draghi and others speaking at a Frankfurt conference with Germany’s Merkel and Schaeuble also in public. His colleague, Bundesbank head Jens Weidmann, is already out saying the euro zone can’t allow any country to blackmail it with the threat of contagion.

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