‘Numerous episodes’ of heightened anxiety ahead for Europe, says RBA’s Stevens

Reseve Bank of Australia governor, Glenn Stevens, says ‘old world’ problems have “riveted” global attention but ECB action prevented another funding crisis

The euro project has had significant economic consequences around the world despite it being not being set up solely or even primarily as an economic project, Reserve Bank of Australia (RBA) governor Glenn Stevens tells delegates attending the Credit Suisse 15th Asian Investment Conference 2012 in Hong Kong on March 19. But he says the problems with the euro have "riveted" global attention and policy-makers realise the importance of resolving the European sovereign debt crisis.

"It is of course quite difficult to lay foundations when the house has already been erected on the site, but that is the job ahead for Europe," says Stevens. "Progress has been made. But there is a long way to go yet. During that journey there will be surely be numerous episodes of heightened anxiety, any one of which could erupt into a more extreme crisis if one or more of the key actors makes a serious mistake."

Stevens adds that the European economy has been in recession for some months but that forecasters such as the IMF expect it to be a light recession.

The RBA governor adds that Australia may be affected by a slowdown in direct trade with Europe, although most of the country's trading activity now takes place with Asia. But he did express concern that if the sovereign crisis is not handled well in Europe, financial markets could again freeze up, effectively closing funding markets.

"The cocktail of sovereign credit concerns, large bank exposures to those sovereigns, possible bank capital shortfalls and prospective large debt rollover needs of banks, not to mention the unpredictable dynamics of the Greek workout, had everyone very much on edge," Stevens says, adding this had global reverberations but the "actions of the ECB have alleviated the immediate funding issues for banks".

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