ECONOMY

Central banks ready to combat Greek storm

Central banks from Tokyo to London checked their ammunition on Friday in preparation for any turmoil from Greece’s election, with the European Central Bank hinting at an interest rate cut and Britain set to open its coffers.

ECB President Mario Draghi said his bank was ready to step in and fund any viable eurozone 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,» Draghi told the annual ECB Watchers conference in Frankfurt, 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.

Officials from the G20 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 prevent 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 G20 summit, expected to be dominated by the eurozone 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.

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 eurozone, 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.”

In a sign of growing strain between Europe’s central powers, German Chancellor Angela Merkel hit out at France on Friday in response to President Francois Hollande’s proposals for joint eurozone bonds and a joint bank deposit guarantee scheme.

“Europe must discuss the growing differences in economic strength between France and Germany,» Merkel told German entrepreneurs, two days before the decisive second round of a French parliamentary election.

Responding to Hollande’s call for more eurozone solidarity, she said Germany had wanted to give the European Court of Justice the power to reject national budgets that breach EU rules but others had objected. She meant France.

Draghi said the ECB was ready to provide money to solvent banks if they needed it, a clear plan to avoid the kind of credit crunch that occurred during the Lehman Brother crisis in 2008.

“The ECB has the crucial role of providing liquidity to sound bank counterparties in return for adequate collateral. This is what we have done throughout the crisis, faithful to our mandate of maintaining price stability over the medium term — and this is what we will continue to do,» he said.

Draghi also said that no eurozone country faces an inflation risk, which is the bank’s main concern. That gelled with comments from ECB policymakers a day earlier that the central bank might be open to cutting interest rates.

Britain did not wait for the Greek vote to announce action. Bank of England Governor Mervyn King said on Thursday the country would launch a scheme to provide cheap long-term funding to banks to encourage them to lend to businesses and consumers.

The central bank would also activate an emergency liquidity supply, King said in his annual Mansion House policy speech to London financiers.

King said the eurozone’s problems were causing a crisis of confidence in Britain that was leading to a self-reinforcing weaker picture of growth.

“The black cloud has dampened animal spirits so that businesses and households are battening down the hatches to prepare for the storms ahead,» he said.

On Friday, the bank said it will hold a first emergency liquidity operation for banks next week with at least 5 billion pounds on offer. Loans would be at a minimum of the Bank Rate, 0.5 percent, plus an additional 25 basis points.

[Reuters]