New global crisis warning

WORLD leaders arriving in Mexico for today’s G20 summit have been warned that Europe’s economic ills could precipitate a second global financial crisis.

On the eve of the summit, outgoing World Bank chief Robert Zoellick said Europe was ripe for a “Lehmans moment” — a reference to the 2008 collapse of Lehman Brothers in the United States and the dire global unravelling that followed.

His warning came as Greeks voted in elections that have the potential to undermine the region’s already fragile economic predicament, and ultimately trigger the eurozone’s break-up.

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A Greek Orthodox priest leaves a voting booth at a primary school in Athens. Photo: Reuters

The vote in Greece came as Spain signed on for a financial bailout — and Italy appeared likely to be next. Ireland, Portugal and Greece have already been bailed out.

Mr Zoellick’s message was that Europe could muddle through. but, he told the Observer, all that was needed to engulf the whole continent — and by contagion the global economy — was fear in the aftermath of the collapse of a single financial institution and a run on its funds by its customers.

European financial institutions are on crisis alert, to manage any collapse of confidence as markets digest the outcome of the Greek vote — the result of which was expected to be known in the early hours of today Melbourne time.

And as European leaders butt heads on how best to salvage the failing economies — either by austerity to save or borrowing for growth — all eyes and ears in the Mexican resort city of Los Cabos will be on German Chancellor Angela Merkel.

The Greek vote was expected to be close run — either a rejection of austerity that might lead to abandonment of the euro; or a willingness to remain in the eurozone, with a plea for some easing of the austerity measures imposed on Athens by its European paymasters.

Dr Merkel appears to be holding to the austerity line. at the weekend she insisted again there would be no renegotiation of the Greek bailout, and that the country must stick to the bargain with its international lenders.

Jean-Claude Juncker, Luxembourg’s Prime Minister and head of the eurozone finance ministers’ conference, warned: “If the radical left wins [in Greece] – which cannot be ruled out – the consequences for the currency union are unforeseeable.”

On arrival in Los Cabos, all G20 leaders were to receive a letter from Prime Minister Julia Gillard. Writing from the lofty perch of Australia’s relative economic success, she warns uncertainty in Europe is “moving us quickly into crisis management mode”.

She seemed to be urging a policy mix of short-term publicly funded growth with longer-term austerity. “the challenge is to focus on ensuring fiscal sustainability over the medium term, while using all available scope to support growth and jobs in the short-term,” she wrote.

“Bringing forward investments in key infrastructure projects is an example of policies that can create jobs and boost demand in the short-run and add to productive capacity in the longer term.”

The Australian stockmarket will be the first major world market to open for business today after the results of the Greek elections are known.

Russell Jones, global head of fixed income strategy at Westpac, warned if the far-left Syriza party won the election, the reaction would be to “sell first, ask questions later.”

“If on the other hand the centre parties dominate, there will have to be some renegotiation, or recalibration, of the austerity program and we’re not really going to know precisely how for some weeks. so either way, I think we’re still left with a situation which is not going to be that clear.”

AMP Capital chief economist Shane Oliver said a decision by Greece to leave the eurozone could spark a new banking crisis and the break-up of the euro. “Greek citizens would likely get wind of an exit and withdraw their euro-denominated bank deposits for fear the new drachma will collapse, triggering a crisis,” he said.

“but the real threat to the rest of the eurozone would come via contagion to other countries. If Greece heads for the exit, fears will grow that Portugal, Ireland, Spain and maybe Italy will do the same.”

“This would risk turning a mild recession in Europe into a deep contraction of 5 per cent. It would probably throw the OECD into a recession and knock 1.25 per cent off world growth,” he said

Treasurer Wayne Swan said the Greek poll was casting a shadow over the global outlook. “Whatever the result, Europe’s challenges remain profound,” he said.

New global crisis warning


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