Bernard Hickey details the key news over the weekend in 90 seconds at 9 am in association with Bank of New Zealand, including growing fear the European financial system is approaching a moment of crisis as Greece nears default.
The IMF, the World Bank and various financial leaders all warned of dire financial consequences over the weekend if Europe cannot stop its financial crisis spreading from a Greek default into the core of the Eurozone.
The Telegraph reported that European officials worked frantically over the weekend to formulate a three pronged 'grand plan' to stabilise the European financial system, including a new bigger 2 trillion euro bailout fund, help from the European Central Bank to expand the size of the fund and recapitalisations worth tens of billion euros of struggling European banks, including France's banks.
In theory, Greece would be allowed to default but would stay inside the Euro. This grand plan would then be enacted to create a 'firewall' around the PIGS (Portugal, Ireland, Greece and Spain).
The crisis worsened over the weekend as the IMF and the World Bank warned the European financial system and the world's major economies were entering a "danger zone." Britain and America warned that Europe needed to solve the crisis within 6 weeks or the consequences wouldn't bear thinking about.
"The threat of cascading default, bank runs, and catastrophic risk must be taken off the table," said US Treasury Secretary Timothy Geithner. See more here at Reuters.
Credit Default Swap spreads have worsened to the levels last seen at the time of the Lehman Brothers collapse in 2008 and the copper price, one indicator of industrial activity, has fallen 17% in 10 days, which is a steeper fall than seen during the Lehman crisis. See our interactive chart here of Credit Default Swap spreads for Australasian corporates, a proxy for Australian and New Zealand bank funding costs for longer term bond issues.
Unlike in 2008 when government could still ramp up deficit spending and central banks could cut interest rates, markets are concerned that authorities have either run out of ammunition or don't have the political cohesion to solve the crisis.
Also, this time around, China is not in the same position to drag the world out of the mire with its own spending spree. The Chinese government has been trying to slow its economy over the last year to stop inflation from getting out of control.
It also faces significant problems inside its local governments with non-performing loans made immediately after the Lehman crisis. China spent wildly on infrastructure to keep its economy going after exports to America slumped. It may not be able to perform the same pump priming role again.
The New Zealand dollar was down at 77.4 USc this morning and has slumped in line with lower expectations for global growth and commodity prices.
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