RBA’s McKibbin Sees Greece as First Carriage in World Fiscal ‘Train Wreck’
Greece is one of several nations that will need to cut spending and boost taxes, slowing global growth even as low interest rates raise the risk of inflation, Australian central bank board member Warwick McKibbin said.
The fiscal outlook “is what I call the slow motion train wreck -- the first carriage to break is going to be the Greek economy, but we have a series of economies facing very serious fiscal adjustment,” said McKibbin, a professor at Australian National University whose board term ends July 30, in a speech in Melbourne today. He said his comments reflected his personal views, not those of the Reserve Bank of Australia.
Greece’s capital has been paralyzed for the past two days by a general strike and protests from more than 20,000 people as lawmakers deliberate on Prime Minister George Papandreou’s $112 billion austerity plan. Having won passage for a bill setting out his strategy for budget cuts, Papandreou must today win a second ballot to execute measures ranging from tax increases to asset sales.
“There’s almost guaranteed collapse or crisis in the euro zone and there’s serious global inflation problems and a policy response looming,” said McKibbin, who is also a senior fellow at the Brookings Institution in Washington. “All of these have implications for relative commodity prices.”
The euro rose to a three-week high on prospects the European Central Bank will raise borrowing costs next week to curb inflation. The currency climbed to as high as $1.4504, the highest level since June 10, before trading at $1.4498 as of 11:59 a.m. in Tokyo.
ECB President Jean-Claude Trichet said on June 28 that policy makers are in “strong vigilance mode.”
Australia is experiencing a surge in resource investment as mining and energy firms boost output to meet demand from China and India, two economies that account for more than a third of the world’s population. That’s bolstered demand for Australia’s dollar, the world’s fifth-most traded currency, which advanced 27 percent in the past year and reached $1.1012 on May 2, the highest since it was freely floated in 1983.
“Everyone seems to be focusing primarily on maximizing the return of this resources boom. I think that’s the wrong focus, we also need to focus on minimizing risk,” McKibbin said. “China and India seem to be in everyone’s minds, but also there is a key contribution from very loose monetary policy.”
The U.S. Federal Reserve has held its benchmark rate near zero since December 2008 and is scheduled to complete Treasury purchases today under a $600 billion program of so-called quantitative easing.
“If you ignore the monetary aspects of what’s happening in the global economy, you are going to be over-optimistic in many projections,” McKibbin said.
Australia’s central bank, in a May 6 policy statement, forecast growth in 2011 at 4.25 percent. Consumer prices will rise 3.25 percent over the period and core inflation will quicken to 3 percent from 2.75 percent, it said. The RBA aims to keep price growth between 2 percent and 3 percent on average.
Greek lawmakers yesterday needed the protection of riot police who frequently deployed tear gas in violent clashes with protesters. A blaze at the Hellenic Post Office, on the ground floor of the building housing the finance ministry opposite the legislature, was doused by fire fighters.
While approval today would pave the way for Greece to secure a fifth tranche of money from the European Union to prevent a default, the yield on the country’s two-year bond yesterday remained above 27 percent for an 11th day.
The yield on the 4.6 percent note maturing in May 2013 has jumped to 27.31 percent from 16.93 percent on April 13, when German Finance Minister Wolfgang Schaeuble raised the prospect that Greece may have to restructure its debt.
Under the terms of the new austerity plan, Papandreou has pledged to find buyers for state assets worth 50 billion euros ($72 billion) and impose levies ranging from 1 percent to 5 percent on wages. He also plans higher taxes on restaurants and bars, higher heating-oil taxes and lowering the tax-free threshold to 8,000 euros from 12,000 euros presently.
The Greek government’s struggles to gain aid needed to avoid a default helped send Australian two-year government bond yields to a nine-month low, on concern Europe’s debt crisis would lead to a repeat of the credit crunch that followed the 2008 collapse of Lehman Brothers Holdings Inc.
“All these issues are going to determine what’s happening in the global sphere and all of these will impact on the Australian economy,” McKibbin said.
RBA Governor Glenn Stevens said in minutes of the bank’s June 7 meeting released last week that his board will weigh developments in Europe against a forecast acceleration in price growth in deciding whether to raise interest rates. Stevens has held the cash-rate target at 4.75 percent, the highest level in the developed world, for the past six meetings.
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