Central Banks Set to Act If Greece Roils Markets: Report

Central banks from major economies stand ready to stabilize financial markets and prevent a credit squeeze should the outcome of Greek elections on Sunday cause tumultuous trading, G20 officials told Reuters.

European Central Bank
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European Central Bank

As the report surfaced, U.S. stocks surged in the final hour of trading Thursday though they pared their gains at the close.

The Dow Jones Industrial Average initially spiked as high as 200 points, then closed up about 155 points. The S&P 500 and the Nasdaq also closed higher.

A senior U.S. official cautioned that the Greek election will not provide "the definitive signal on what happens next" in the euro zone debt crisis.

But if severe market strains emerge after an unusual confluence of three elections this weekend — there are important polls in Egypt and France as well — central bankers are on standby to ensure enough cash is flowing through the financial system.

S&P 500

"The central banks are preparing for coordinated action to provide liquidity," said a senior G20 aide familiar with discussions among international financial diplomats. His statement was confirmed by several other G20 officials.

While central banks might stand together to counter credit tightness and market volatility, the bar would be far higher for coordinated monetary easing, which is considered unlikely.

None of these measures was approaching severe stress on Thursday.

It could mark a dramatic backdrop to the G20 summit of world leaders who will gather in Los Cabos, Mexico, on Monday and Tuesday where Europe's escalating crisis tops the agenda.

Leaders will be accompanied by finance ministers playing an advisory role. The ministers, who usually keep a low profile at these summits, have scheduled a working dinner on Monday and lunch on Tuesday.

Depending on the severity of the market response, an emergency meeting of ministers from the Group of Seven developed nations could be held on Monday or Tuesday in Los Cabos with central bankers joining by phone, a second G20 official said.

Their first line of defense probably would be a statement that policymakers are ready to take whatever steps are needed to assure market stability.

This usually is a signal for technical steps to keep cash flowing through the financial system. Already in place are currency swap lines, which can be drawn upon to ensure there are enough dollars available if global investors rush into the safety of U.S. assets. Central banks also can hold extra auctions to flood banks with short-term cash via repurchase agreements.