ECB Says European Financial Integration Dealt Setback by Crisis

The European Central Bank said the sovereign debt crisis has caused a “marked deterioration” in financial integration in the euro area and urged governments to strengthen policy frameworks.

“During 2011, the intensification of the sovereign bond crisis strongly affected the euro-area financial system” and “the integration of markets has deteriorated further,” the ECB said in its annual report on financial integration in Europe published in Frankfurt today. “The indicators of money-market integration presented in this report suggest that, at shorter maturities, the integration gains achieved in early 2011 were reversed.”

More than two years after the debt crisis erupted in Greece and spread to Ireland and Portugal, investors are questioning whether Spain can rein in its deficit, driving up the country’s borrowing costs. The ECB pumped more than 1 trillion euros ($1.3 trillion) into the euro-area banking system this year in an effort to get credit flowing again.

“After the turn of the year, and especially after the allotment of the second ECB three-year refinancing operation, the indicators of financial integration have shown signs of improvement,” the ECB said in today’s report. Still, “to preserve the sizeable benefits for the European citizen that have been made in the past 25 years, the enhancements of the Single Market Program and the strengthening of the euro-area policy frameworks should be brought forward,” it said.

Money Markets

The ECB said secured and unsecured money markets have become increasingly impaired, especially across borders. Corporate bond markets have also experienced “significant tensions in both the financial and non-financial sector,” it said.

“The impact of the sovereign crisis on cross-border integration seems to have been limited in equity markets, relative to bond markets,” the ECB said. “Cross-border holdings are not displaying significant discrimination with regard to the country of origin. Also national stock price indices seem to be reacting without an overwhelming country- specific influence.”

Indicators of euro-area banking market integration generally signalled a slower pace of deterioration during the financial crisis relative to other markets, it said. “However, more recently in both the retail and wholesale euro-area banking markets there is evidence suggesting a slow erosion of the earlier -- equally slow -- progress towards financial integration.”

To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net

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

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