The Reserve Bank of Australia recently had their July policy meeting in which the current state of both the domestic and international financial markets was under discussion. Among those present were Chairman and Governor Glenn Stevens and Deputy Governor Ric Battellino.

According to the minutes of the meeting, the board members discussed the economic crisis in Greece, with developments in the Greek economy having been the major factor influencing financial markets over the last month. Towards the end of June the outlook was generally pessimistic; however, improvements were seen with the implementation of fiscal measures by the Greek government. The new package was important for the coming tranche of official funds to be allocated under the original program of the EU and IMF. Uncertainty remains regarding compensation for the funding gap for the year 2012 given that Greece is currently unable to raise funds in their bond markets. The original aid program thought that Greece would be able to raise funds around €25 billion.

Other options are being considered for bridging the funding gap. Part could come from further budget measures and increased official assistance, and part from the participation of current bond holders in a debt rollover. Problems with the second option, however, include the need to avoid such a proposal being characterized as a debt default. A uncontrolled default could damage the global economy, if there were contagion to other European countries and a resulting loss of confidence in policymakers’ ability to control the fall out.

Reflecting concerns about Greece, the yield spread between the German bonds and sovereign bonds of countries in Europe receiving financial aid from IMF and the EU all reached new highs.