“This vicious circle must be stopped, the sooner the better,” Bofinger said in Berlin today. “I think what Italy needs are interest rates of 4 percent rather than 7 percent. That’s why an effort is required.”
Italy sold 5 billion euros ($6.79 billion), the maximum amount, of one-year bills at the highest yield in 14 years today after yields yesterday on 10-year notes surged past the 7 percent level at which Greece, Ireland and Portugal sought international bailouts. Italian government bonds rose as the European Central Bank was said to purchase the Mediterranean country’s debt.
Bofinger, one of five economic advisers to Merkel, repeated his proposal for a fund backed by euro-region states’ gold reserves that would be worth 2.3 trillion euros and help governments scale back outstanding debt to below 60 percent of economic output. The fund would be accompanied by a pledge by euro-member states to anchor debt limits in their constitutions, and thus bring bond yields down, he said.
“If that doesn’t work, in the end only the ECB is left,” Bofinger said in the interview. “But if they do it, then they should do it in a much more comprehensive way. They should then announce upper limits for the yields.”
Viewing Italy in the context of the Group of Seven, it’s “almost absurd” that Italy has to pay much more than the U.K. to refinance its debt even though the U.K. budget deficit is almost twice as much as Italy’s, Bofinger said.
Bofinger suggested the ECB should set a cap at 4 percent on Italian bond yields and defend that limit, though such intervention would be difficult for Germany to “reconcile,” he said.
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