Countries across world gird for Greece turmoil
TOKYO/ZURICH (Reuters) - The threat of turmoil sweeping across global markets next week if Greece's election prompts a panicky flight of money from the euro zone has policymakers from Beijing to Zurich preparing to protect their currencies and economies from an unwelcome influx.
Swiss National Bank President Thomas Jordan is among the most vociferous, dangling the threat on Thursday of imposing capital controls to stop the Swiss franc from soaring as a result of investors seeking the currency's relative safety.
"The SNB will not tolerate this," he said bluntly.
Switzerland is not alone. The Bank of Japan is prioritizing market stability, according to one source, with economists saying the bank's main concern would be to stop the yen taking off.
Intervention would be a likely response should the yen rise too high for the authorities' taste. With G20 leaders meeting in Mexico next week there is even speculation of a coordinated global response although no evidence of that has emerged so far.
India has a range of crisis management groups within the government set up to deal with euro zone-triggered financial stress, according to Kaushik Basu, the finance minister's chief economic adviser.
In China, key agencies including the central bank, have been asked to come up with similar plans, sources said last week. Measures may include keeping the yuan steady and stepping up policies to stabilize the economy, they said.
The big concern for all these countries - and others across Europe and the Americas - is that a victory on Sunday by parties in Greece opposed to austerity attached to its second bailout will send the euro zone further into crisis by pushing the country towards the currency bloc's exit door.
There are already signs of contagion. Spanish 10-year bond yields rose above 7 percent for the first time in the euro era on Thursday, hitting a level widely seen as being unsustainable.
It has all triggered concerns about another global financial market spasm similar to the one that followed the collapse of Lehman Brothers in 2008.
"Europe's debt problems are the biggest risk to the global and Japanese economies," BOJ Governor Masaaki Shirakawa told parliament this week. "A loss of market stability will lead to a severe economic slump, as we experienced during the Lehman crisis.
Norway could also suffer a hot money surge. It could cut interest rates in extremis to curb its currency, and has a monetary policy meeting next week, but with an already thriving economy it would risk overheating.
Fellow euro outsider Denmark is in a similar camp. Its central bank, and a top Swiss central banker, said last month that they were looking at the possibility of deploying negative interest rates.
DEFENDING THE FORT
Switzerland is already working to protect its economy from uncontrollable franc strength, a condition that damages exports and raises the danger of deflation.
It imposed a cap of 1.20 francs to the euro last September and pledged on Thursday to defend it.
"Even at the current rate, the Swiss franc is still high. Another appreciation would have a serious impact on both prices and the economy in Switzerland," Jordan, the SNB chairman, said. "If necessary (the bank) stands ready to take further measures at any time."
Jordan did not say whether capital controls - stopping money from flowing in and out - were under consideration, but he pointedly did not rule them out, saying: "We are continuously looking at all possible other measures."
Sources in Tokyo said capital controls had been discounted in Japan because of the size of the economy, the world's third largest.
But with the shock of the 2008/2009 crisis still fresh, the country is not taking any chances. Indeed, many of the policies adopted in 2008/2009 are still in place, such as near zero central bank interest rates and easier collateral terms for short-term funding operations.
The Bank of Japan still has a Lehman-legacy dollar-swap arrangement with the U.S. Federal Reserve, as do others. The latest extension of the deal, which allows the BOJ to tap unlimited amounts of dollars, runs to February 2013.
The most probable scenario Japanese policymakers are looking at is a flood of money rushing into yen assets, according to several interviews in the past week with central bank and government officials who craft economic policy.
Money has flowed into the yen fairly persistently since the euro area crisis erupted in late 2009 and the currency hit a record high of 75.31 yen per dollar in October.
Further upward pressure would spark fresh currency intervention by authorities, especially after the IMF said this week such a measure was an option to ease volatility. The BOJ could also ease policy by increasing the spending limit on its main tool - a 40 trillion yen ($504 billion) asset buying fund.
(Written by Jeremy Gaunt and Leika Kihara. Editing by Mike Peacock)
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