Meetings of G20 finance ministers and EU leaders top and tail this week with Greece’s fate uppermost in policymakers’ minds and global turbulence caused by diverging monetary policies and cheap oil coming a close second.
The central bank world has been upended by a steepling fall in oil prices, and the effect that may have on inflation and growth, and the prospect of the European Central Bank creating 1 trillion euros out of thin air.
The Swiss National Bank caused currency turmoil by abruptly ending its Swiss franc cap. Impromptu interest rate cuts have followed from India to Australia and Canada to Denmark, while China has cut bank reserve requirements.
On the other side of the ledger, the prospect of a first U.S. interest rate rise this year highlights the very different directions major central banks are heading in.
A by-product of that is the dollar being driven higher while stimulus from the ECB and Bank of Japan, among others, drives other major currencies lower.
All that will be front and center for finance ministers and central bankers from the Group of 20 nations who meet in Istanbul on Monday and Tuesday, as will the perennial debate about countries that can afford to do so spending more to generate demand.
“The rest of the world cannot depend on the United States to be the sole engine of growth,» Treasury Secretary Jack Lew told U.S. lawmakers last week.
Germany, with its giant current account surplus, has consistently rejected that approach and last year balanced its budget for the first time in more than four decades.
Lew said he saw no signs of active currency manipulation and officials from other G20 countries do not expect Washington to complain while its economy is growing robustly, something a strong U.S. jobs report testified to on Friday.
The economics debate in Turkey has taken an interesting turn with President Tayyip Erdogan pressuring the central bank to cut rates more sharply and stating that would lower inflation.
Sweden could be the latest to adopt unconventional policies when its central bank meets. The Riksbank has said it could take new steps as early as its meeting on Thursday. These could include negative rates, offering cheap loans to banks and buying bonds.
The Bank of England’s quarterly inflation report must surely cut its inflation forecasts and implicitly push back the timing of a first UK rate rise.
“We currently believe it is borderline as to whether the Bank of England starts to raise interest rates at the end of this year or holds fire until early 2016,» said Howard Archer, chief UK and European economist at IHS Global Insight.
Greek Prime Minister Alexis Tsipras will attend his first EU summit on Thursday having failed to win support for a debt renegotiation and easing of austerity.
The day before, the Eurogroup of euro zone finance ministers will meet to pave the way.
The euro zone’s position has not shifted despite a Greek charm offensive around EU capitals and the ECB has upped the ante by making Greek banks ineligible for its funding operations, something it didn’t have to do until the Greek bailout expires at the end of the month.
“As things stand we consider the most likely outcome to be a Eurogroup offer of a new third program,» said Deutsche Bank strategist George Saravelos. «At the same time such an offer is very likely to be attached to strict conditions.”
Greece said on Saturday it would hand the Eurogroup meeting a plan for managing its transition to a new debt deal.
There is economic logic in easing up on austerity to galvanize growth and thereby increase the tax base and cut debt, but there is no question of writing off Greece’s debts, which are overwhelmingly held by euro zone institutions and governments.
Greece could in the end be given more time to pay off its debt if it keeps its budget in balance and maintains promised reforms. Athens is tasked with running a hefty primary budget surplus and could be allowed to eat into that a little.
No one wants to question the durability of monetary union by letting Greece leave the euro but Tsipras will have to settle for less than the campaign slate he won Jan. 25 elections on. And to buy time, he may well have to drop his opposition to extending the bailout, though it could be called something else.
“The most realistic way forward is to… extend the duration of the program for another couple months or half a year, thus allowing also more time for negotiation,» European Commission Vice President Valdis Dombrovskis told Reuters.