ECB’s Knot Says Buying Euro-Zone Country Bonds Puts Central Bank at Risk
European Central Bank Governing Council member Klaas Knot said buying bonds of euro-zone countries poses a risk to the central bank and shouldn’t continue longer than necessary.
“Purchases of bonds in markets under stress implies a financial risk to the Eurosystem’s balance sheet,” Knot said in a speech published on the website of the Dutch central bank today. “This may eventually lead to fiscal transfers without democratic legitimacy.”
Increased Italian borrowing costs today raised concern that European Union leaders haven’t done enough to stem the region’s debt crisis. As next week’s Group of 20 summit looms, some European nations including Greece and Italy remain under pressure to restore fiscal order, and the burden will be on the ECB to keep buying bonds under its new president, Mario Draghi, when he takes over on Nov. 1.
“All monetary policy can do is to buy time, at the cost of stretching its mandate to the limit, and of course this should not go on any longer than strictly necessary,” said Knot, who also heads the Dutch central bank.
Knot repeated his support for common euro bonds in the long run, which he sees “as a sustainable solution to self- fulfilling liquidity/solvency problems in individual member states and domino-effects/contagion between euro-area member states.”
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