European Rescue Fund May Buy Bonds, Recapitalize Banks, ECB's Stark Says

European Central Bank Executive Board member Juergen Stark said measures to strengthen the region’s rescue fund could include purchases of government bonds or injecting cash into commercial banks.

“I could imagine the” European Financial Stability Facility “recapitalizing banks or buying sovereign debt,” Stark said in an interview with Dutch newspaper Het Financieele Dagblad published today, according to an e-mailed transcript from the Frankfurt-based central bank. “But this issue has to be decided at the political level.”

European leaders are seeking ways to overhaul their crisis- response measures after Ireland and Greece last year were both forced to seek external aid. While the ECB purchased government bonds and provided banks with unlimited cash to fight the region’s fiscal crisis, President Jean-Claude Trichet has called on governments to step up efforts to restore confidence.

The decision to buy government bonds was an “extraordinary step taken under extraordinary circumstances,” Stark said. ECB council member Athanasios Orphanides said on Jan. 14 that the central bank may be able to stop buying bonds if “EFSF asset purchases improved the functioning of the monetary-policy transmission mechanism.”

Stark also reiterated his opposition to governments issuing euro bonds, saying they “would provide a disincentive to pursue sound policies at the national level.” He also said the euro is a “stable and well-respected currency” and that the single currency “will not fail.”

To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net

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

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