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World braces for Greek financial upheaval

 

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 prioritising 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.

 

In China, key agencies including the central bank, have been asked to come up with plans for euro-triggered financial stress, sources said. Measures may include keeping the yuan steady and stepping up policies to stabilise 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% 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 said 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.

 

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.

15/6/2012



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