Trichet Seeks Increased Bailout Fund to Allow Flexible Response to Crisis
ECB President Jean-Claude Trichet
Denis Doyle/Bloomberg
European Central Bank President Jean-Claude Trichet told reporters, “We’re calling for maximum flexibility and maximum capacity, quantitatively and qualitatively.”
European Central Bank President Jean-Claude Trichet told reporters, “We’re calling for maximum flexibility and maximum capacity, quantitatively and qualitatively.” Photographer: Denis Doyle/Bloomberg
European Central Bank President Jean-Claude Trichet said European governments should consider extending and broadening the region’s bailout fund, stepping up pressure on leaders to fight the fiscal crisis.
“We’re calling for maximum flexibility and maximum capacity, quantitatively and qualitatively,” Trichet told reporters at an event in Frankfurt late yesterday, responding to a question whether the European Financial Stability Facility should be able to buy government bonds.
The ECB is pushing governments to shoulder more of the burden in tackling the fiscal crisis after Ireland was forced last month to seek a bailout, sparking concern that contagion will spread through the euro region. The ECB last week bought the most sovereign debt since June and Spanish bonds today fell for a seventh day as it paid more in a debt sale.
“The Governing Council is clearly quite reluctant to step up its own bond purchases so therefore, they’re implicitly calling on governments to address tensions in bond markets,” said Julian Callow, chief European economist at Barclays Capital in London. “At the end of the day, the ECB is concerned about its long-term credibility.”
Capital Base
Council member Ewald Nowotny said on Dec. 10 that European central banks have been forced to take on “a whole range of extra risk” and may need more capital. Trichet said he has “no particular comment” on the topic. Vice President Vitor Constancio said on Dec. 10 that an increase of the rescue fund and more flexibility would be “helpful.”
EU leaders meeting in Brussels for a summit in two days are divided over the next steps in containing the debt crisis. Germany and France have rejected increasing the bailout fund and dismissed calls by Italy, Belgium and Luxembourg to issue joint euro-region government bonds. Trichet yesterday signaled support for the German and French position.
“In the previous period, the ECB had said that it was not necessarily appropriate to have such type of bonds,” Trichet said. “We were very clear on that. At this stage, there is no new position on the Governing Council of the ECB.”
Governments across the region have embarked on programs to bring deficits back in line with the European Union’s budget rules. The Irish government last week pledged spending cuts worth 6 billion euros in 2011 ranging from child benefits to government salaries to push down the country’s budget shortfall.
Soothe Tensions
“I am sure that the program is suited to bring about a sustainable stabilization of the Irish economy and soothe tensions in financial markets that are associated with the Irish fiscal problems and the reorganization of its banking sector,” Trichet said. “The program will also contribute to restoring confidence and safeguarding financial stability in the euro area as a whole.”
Several euro-area governments are facing “difficult” market conditions, Standard & Poor’s Ratings Services said today. Belgium had the outlook on its credit rating cut to “negative” from “stable” by S&P and Spanish bonds fell as the country paid higher costs to sell more than 2.5 billion euros of securities.
The extra yield that investors demand to hold Spanish 10- year government bonds rose nine basis points to 257 basis points today. It touched a euro-era closing high of 283 points on Nov. 30.
Trichet also said that governments need to do more to toughen fiscal rules and they stopped short of more automatic penalties that the ECB had demanded.
Quantum Leap
“These proposals in our view do not yet represent the quantum leap in economic governance that is needed to be fully commensurate with the monetary union we have created,” Trichet said. Sanctions should be applied in a “quasi-automatic” way and include fines and “possible limitations of voting rights for member states in persistence violation,” he said.
The Frankfurt-based central bank on Dec. 2 delayed its withdrawal of unconventional measures, extending unlimited liquidity supply for the financial sector into the second quarter of 2011. The ECB that day also kept its benchmark interest rate at a record low of 1 percent.
“We consider the two tools we’re utilizing, the standard measures, the interest rates, and the non-standard measures, as being relatively independent,” Trichet said. “We could go up and down with one tool and let the other unchanged and do the same with the other tool.”
Addicted Banks
The ECB is seeking ways to reduce banks’ dependence on emergency-liquidity measures. A “small number of institutions” is “excessively reliant on central bank liquidity,” it said in a report published last week.
“We look at all elements that would permit us to be back at a normal situation, which calls for our own non-standard measures to be progressively phased out” and “for banks to have a normal attitude” towards ECB liquidity, Trichet said. “We try to help the overall move in this direction. Of course we have to take into account reality.”
Trichet said the ECB is “extraordinarily attached” to keeping its monetary policy stance “unchanged” at the moment.
To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net.
To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net
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