Global markets appear to be unsure that the Greek debt crisis will be resolved in an orderly way. The Fed meanwhile is taking a more blasé approach. Paul-Martin Foss writes:
As the Greek crisis comes to a head, it seems to be dragging much of the world with it. Despite the months of negotiations and the clear indications that Greece was not going to give in, it seems to have caught many people unawares, Fed officials among them. Greece was never a huge topic of conversation from the Fed. At Janet Yellen’s press conference the other week, only one journalist, from Agence France Presse, even asked the Chairman about the Greek situation. Everyone else seemed to be focused on a rate rise, to the exclusion of more immediate, pressing concerns such as Greece.
QUESTION: Hello. Hi, Jeremy with Agence France Presse. I have a question on Europe. As you know there is a growing political gridlock and Greece and the Grexit scenario is getting likely. Do you feel it can impact the global and US economy and can it influence in any way when you will decide to increase the interest rates?
CHAIRMAN YELLEN: Well, unfortunately Greece and its creditors are faced with very difficult and consequential decisions at this point and in the days ahead and my hope is that they will continue to work together to try to find a solution to the, you know, current difficulties and impasse. Obviously European leaders place great value on preserving European monetary economic and political integration and the Greek people have made clear that it is important to them to remain in the euro area. This is a very difficult situation. In the event that there is not agreement I do see the potential for disruptions that could effect the European economic outlook and global financial markets. I would say that the United States has very limited direct exposure to Greece either through trade and financial — financial channels but to the extent that there are impacts on the European economy or in global financial markets there would undoubtedly be spillovers to the United States that would affect our outlook as well.
Listening to her answer live, it was clear that she didn’t seem at all concerned about the seriousness of the situation, it was just one of many concerns. Nor was Greece addressed in the FOMC statement.
San Francisco Fed President John Williams was even more explicit about the risks (or lack of) to the US from the Greek situation.
“My own view is this is obviously one of those contagion risks we have to be concerned about.”
“Right now it is a ‘watch and see’ with a baseline that what is happening in Greece won’t have huge repercussions in the U.S.”
And yet world markets tumbled this morning in response to the Greek bank holiday. Certainly the long-term ramifications still remain to be seen, but major crises are often precipitated by seemingly small events that expose underlying weaknesses.
- Global Markets Slide on Greek Crisis Fears (CNBC)
- Citigroup Leads Losses for Major US Banks (MarketWatch)
- Heavy Hits Being Taken by US Hedge Funds that Hold Billions in Greek Government Debt (Economic Policy Journal)
- Wall Street Seen Lower as Greek Crisis Rocks Markets (CNBC)
- Wall Street Falls as Grexit Fears Grow, Volatility Spikes (Reuters)
- Greece May Keep Most Markets Weak (Reuters)
And while we know that the Fed has probably been paying at least some attention to what is going on in Greece, it has said precious little publicly about its actions. For a central bank that has focused so much in the past on “expectations management” and speaking to assure markets that the Fed is in command, this silence is a little puzzling. It would be nice to know what exactly the Fed is doing in response to events in Greece. Or has Janet Yellen forgotten that she runs the most transparent central bank in the world?
