ECB Policy Can't Be Substitute for Irresponsible Governments, Trichet Says

European Central Bank President Jean- Claude Trichet warned governments not to rely on the ECB to get Europe out of its debt crisis and urged them to step up efforts to tighten fiscal rules.

“Monetary-policy responsibility cannot substitute for government irresponsibility,” Trichet told German lawmakers today in Wildbad Kreuth, Bavaria, according to a text provided by the ECB. “Europe cannot afford to rest halfway, we need to be more ambitious. The proposals that we have seen in Brussels do not go far enough in the ECB’s view.”

Belgian and Irish credit-default swaps reached a record today and the cost of insuring the debt of nations from Portugal to Italy also rose. European finance ministers have pledged to toughen budget-deficit rules in a bid to contain the region’s debt crisis, though they have stopped short of meeting the ECB’s demand for more automatic penalties.

“We should be inflexible in applying sanctions if rules are breached,” Trichet said. “In limiting the power of discretion, we will strengthen the power” of the Stability and Growth Pact. “There must be a binding code of conduct for all parties concerned.”

The Markit iTraxx SovX Western Europe Index rose 1 basis point to a record 214 basis points today after credit-default swaps on Belgium jumped 14 basis points and Ireland’s increased by 6 basis points to an all-time high. Contracts on Portugal rose 9 basis points to 534, the highest level since Nov. 30.

Euro Drops

The euro today headed for its biggest weekly loss against the dollar in more than a month on bets the U.S. economy will recover faster than Europe’s. The single currency fell to $1.2983 at 3 p.m. in Frankfurt, down from $1.3385 a week ago, after a U.S. payrolls report showed employers added jobs for a third month and the unemployment rate dropped to 9.4 percent.

With the sovereign crisis showing little sign of abating, a Chinese central bank official pledged today that Europe and the euro will remain an investment priority for the nation’s world- record $2.65 trillion of foreign-exchange reserves.

“The euro and the European financial markets are an important part of the global financial system and were, are and will be one of the most important investment areas for China’s foreign-exchange reserves,” Deputy Governor Yi Gang said in a statement on the central bank’s website.

Emergency Measures

The ECB in December extended emergency liquidity measures for banks through the first quarter after Ireland’s aid package failed to convince investors that governments can push down budget deficits and prevent a breakup of the euro area. It has also stepped up government bond purchases after pausing the program for three weeks in October. Trichet said the purchase program is “ongoing.”

The ECB bought Portuguese government debt today, according to two people with knowledge of the transactions. The purchases mostly involved short-term securities, said one of the people, who asked not to be identified because the trades are confidential.

The ECB decided to buy sovereign debt in May to supplement a 750-billion euro ($974 billion) rescue plan for debt-stricken nations. It had already bought 60 billion euros of covered bonds to encourage bank lending, which Trichet said today will be held to maturity.

‘Malfunctioning’ Markets

The decision to buy government bonds “was certainly not to finance debt-laden member states, but to address some severe malfunctioning of markets,” Trichet said. “Let me stress solemnly that our monetary-policy stance is itself designed to deliver price stability over the medium term.”

The lawmakers from German Chancellor Angela Merkel’s Bavarian allies, the Christian Social Union, backed Trichet’s stance and said the bank must refocus on its core inflation fighting remit and limit its bond purchases.

“The independence of the ECB must be upheld and political influence continue to be ruled out of decision making,” the CSU, the sister party to Merkel’s Christian Democrats, said in a policy paper presented to Trichet today.

Euro-area inflation accelerated to 2.2 percent in December, exceeding the ECB’s 2 percent limit for the first time in more than two years. Economists forecast the bank will raise its key interest rate from a record low of 1 percent in the fourth quarter of this year, a Bloomberg survey shows.

To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net; Christian Vits in Wildbad Kreuth, Germany, at cvits@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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