–Liquidity Support Just Buying Time For Greece, Not Solving The Problem

LONDON (MNI) – The Bank of England expects lending spreads to
narrow after it hikes Bank Rate, Governor Mervyn King said Tuesday in
evidence to the Treasury Select Committee.

If this spread compression does occur, it means the impact of a
rate hike, or hikes, will be cushioned. King was asked about the timing
of policy tightening, and he said a rate hike would come at some point,
depending on the inflation outlook.

The BOE Governor once again attributed current high inflation
outturns to import cost, tax hikes and energy price increases.

Contingency Planning For Greek Default

In the early part of his evidence to the Treasury Select Committee,
King was grilled about the likelihood of a Greek default. He refused to
be drawn on the probability of a default, but said it was high enough
for the BOE to have put in place contingency plans.

“I personally don’t ascribe a risk to Greek default. It is not for
me to do,” he said.

He noted that the BOE’s Financial Stability Review assessment
showed the market “ascribes a probability of 80% to some aspect of
default.”

“The more important thing (than guessing how likely a Greek default
is) is to try and tackle the underlying problems,” King said.

With the market placing a high probability on default that is
enough “for us to think carefully about contingency plans and the
consequences of a default.”

The BOE head said the current problem “goes much wider than just
the euro area.”

He said the crisis stemmed from unsustainable national borrowing
patterns before the financial crisis and “What the crisis revealed ….
was this was unsustainable and couldn’t carry on.”

“If you have a very large net external debt and you want to
continue to service that debt, the only way to do it is to run trade
surpluses,” King said.

This lesson of economics “applies to us. But it particularly
applies to the euro area and it is up to them to find a way through it.”

King said one of the message he was delivering when he presented
the Financial Stability Review last Friday was that liquidity
support, to Greece and elsewhere, was just a way of buying
time.

“Providing liquidity support may buy time to put in place a
long-term strategy, under which this competitiveness can be regained.
So far the time that has been bought by the provision of liquidity has
not really been used to put in place programmes that can guarantee
significant improvement and competitiveness,” he said.

“Buying time is not sufficient, that time has to be used,” he
added.

“I don’t think that buying time appears attractive
very often because the immediate crisis appears to go away. Youl get
to bed earlier, you’ll relax more. But in fact the underlying problems
have not changed, the crisis comes back in more severe forms and that
has been the case going through the past 18 months in trying to deal
with Greece, Portugal and Ireland and indeed the problems for the euro
area as a whole,” he said.

–London newsroom: 4420 7862 7491; email: drobinson@marketnews.com

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