Thursday, July 07, 2011

Get worried, it'll be more than Greece - Swan

The Greek financial crisis could spread Europe-wide and then to the United States creating global turmoil, Treasurer Wayne Swan has warned parliament.

Delivering a ministerial statement Mr Swan said in recent weeks the risks to global recovery had become more pronounced and the recovery itself had weakened.

“We have seen a hit to the Japanese economy as well as disruption to international supply chains. In the United States, a depressed labour market, unprecedented weakness in the housing market and high oil prices are all holding back recovery,” he said.

“Most significantly, we have seen debt problems confronting a number of European economies – especially Greece. I welcome efforts to avert what would have been an immediate default. But we should not underestimate the challenges ahead.”

“The potential for contagion is significant, particularly in the event of a disorderly default or an unravelling of assistance. With banks in Europe and the US holding significant amounts of European government debt, such contagion could generate renewed financial market turmoil globally".....

The challenges were highlighted by a decision of the Moody’s credit rating agency Tuesday night to slash Portugal’s rating by four notches to below investment grade. Moody’s warned of an “increasing probability Portugal will not be able to borrow at sustainable rates”.

Mr Swan said it was “essential” other European nations took decisive action to assist Portugal, Greece and Ireland.

It was “not just Europe” that faced challenges of fiscal sustainability.

“The United States and Japan are faced with balancing the need to avoid undermining their economic recoveries in the short term, while setting in place credible medium-term plans to address high and rising public debt,” Mr Swan told Parliament.

The Treasurer’s statement is the strongest yet about the risk of a new global financial crisis and echos concern in the Reserve Bank governor’s statement released after Tuesday’s board meeting.

Ahead of that meeting outgoing board member Warwick McKibbin told a conference in Melbourne the global economy was facing a "slow motion train wreck" that could make the previous financial crisis look like a “blip”.

Shadow treasurer Joe Hockey accused Mr Swan of trying to distract attention from weakness in the domestic economy.

“Perhaps he wants us to believe the loss of confidence is linked to concerns on the international front,” he told parliament.

Published in today's SMH

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