Hindsight is 20/20 and all that, but Mark Carney surely regrets declaring in April that the European debt saga had moved “from the acute to the chronic.”
Make that, ahem, “chronically acute.”
As the epicentre of what threatens to degenerate into a thoroughly unmanageable crisis volleys back and forth and around, from Athens to Madrid to Brussels, the Bank of Canada Governor is less than a week away from his first interest-rate decision since things started to look more and more tenuous.
Recall that just a few weeks ago, an upgraded forecast and renewed warnings about household debt had economists and investors believing that Mr. Carney would be hiking borrowing costs by the fall, with an outside chance of an opening salvo at the central bank’s June 5 decision in Ottawa. Ever since, the economic data on both sides of the Canada-U.S. border have been a bit hit-and-miss, and since early May the risk of a Greek exit from the euro zone has rippled through markets and shaken confidence.
Mr. Carney’s last decision, on April 17, was vague enough on the timing and degree of any rate hikes that “may become appropriate” depending how things evolve, globally as well as domestically. And big back-to-back monthly job gains in March and April suggest rate hikes this year are still conceivable.
However, the statement next Tuesday will likely paint a grim picture of the external backdrop.
And if you want a sense of how much the European situation is weighing on Mr. Carney (and policy makers everywhere), look no further than the latest assessment from the Financial Stability Board, the Group of 20-linked body that he has chaired since November.
“After a period of calm in financial markets earlier this year, tensions have increased more recently and risk aversion has returned to elevated levels,” the FSB said in a statement issued overnight, at the end of a two-day meeting in Hong Kong. “In the euro area, the adverse feedback loop between sovereign debt strains, weak economic growth and fragile banking systems has intensified. There has been a pull-back in cross-border financial activity. Against this background, risks of adverse spillovers to global financial markets and economies have increased.”
It’s worth noting that Mr. Carney’s Bank of Canada forecasts are generally based on the hope that despite the likelihood of a long, painful economic downturn in Europe, policy makers will be able to keep the crisis from spreading out of control and causing another global financial crisis. Clearly, the language above suggests Mr. Carney and his FSB colleagues are very worried that the “downside risks” to the containment scenario are rising.
(Indeed, Dow Jones reported Tuesday afternoon that Lael Brainard, a top official in the U.S. Treasury Department, was in Athens to start a four-day fact-finding tour in Europe to assess what is being done to ensure the crisis doesn’t spread across the Atlantic and torpedo the American recovery. Since Canadian banks have little direct exposure to Europe, and since Canada does far less trade with Europe than with the U.S., the impact on the world’s No. 1 economy is viewed as the key channel through which Canada would suffer.)
According to reports, Mr. Carney was careful to note that he does not yet see signs of a major “spillover” from Europe to other financial markets. But he also refused to comment on whether the FSB had talked much about the possibility of a Greek exit or made preparations for such an outcome.
“I’m not speculating on any possibility,” he said, according to Dow Jones, “or particular circumstances.”
He did say, though, that the FSB is watching the situation closely.
“All FSB members remain committed to strong co-operation to support market functioning,” the group said in its statement. “Central banks, supervisors and treasuries are maintaining close dialogue and co-operation during this period of heightened uncertainty.”