Nov. 29 (Bloomberg) -- France’s central bank chief rejected the view that the euro region is undergoing a systemic crisis, playing down the risk of contagion from Ireland’s turmoil and hailing the euro as a “tremendous success.”
It’s “nonsense” to generalize current problems to all of Europe, Banque de France Governor Christian Noyer said in a press briefing in Tokyo today. While Ireland is coping with the legacy of a burst property-market bubble and Greece with the consequences of mismanaging its debt, Spain is in “good hands” and has already addressed issues with its smaller banks, he said.
Noyer’s remarks confront a widening sell-off in euro-region government bonds since the bailout of Greece earlier this year, with yields on so-called euro-region periphery nations surging to the highest since the 1991 introduction of the euro. The currency is heading for its biggest monthly slide against the dollar since May on concern the debt crisis will spread.
“Non-standard measures will be kept as long as necessary” at the European Central Bank, Noyer, a member of the ECB’s governing council, also said. The bank in May agreed to prolong emergency lending to banks and purchase government bonds outright for the first time.
The ECB bought Portuguese government bonds on Nov. 26, according to four people with knowledge of the transactions, amid speculation that nation will come under pressure to tap the European rescue fund. Janet Henry, chief European economist at HSBC Holdings Plc in London, said officials are likely to give more help to banks in Spain and Portugal, and could ultimately extend its bond-purchase program to Spanish securities.
Noyer on Spain
Spain’s problems aren’t of the same magnitude as Ireland’s, Noyer said today. “In Portugal, the situation is improving as planned. The Portuguese government has confirmed its commitment to ensure a reduction of the public deficit to 4.6 percent in 2011,” he said, referring to the ratio of gross domestic product.
Overall, the public finances of Europe are in better shape than in many countries, including the U.S., the central banker said in remarks earlier at a conference in the Japanese capital.
Europe’s economic recovery is “well on track” and the region isn’t facing a crisis of confidence in its currency, he said. The euro is a “tremendous success” and has helped the ECB deliver price stability, he said. Questions on the future of the euro are “totally” off the table, he also said today.
European finance chiefs ended crisis talks in Brussels yesterday with an 85 billion-euro ($112 billion) aid package for Ireland. Meantime, Greece was given an extra four-and-a-half years to repay emergency loans totaling 110 billion euros to match the seven-year term under Ireland’s deal.
Europe has addressed challenges “very seriously,” and Ireland has started taking extremely tough measures, Noyer said.
“The package is very well-tailored and will restore competitiveness in Ireland,” he said. “It will be a major objective for all members of the European Union to do everything necessary to be in a position to fully honor their debt in the future.”
The finance chiefs yesterday endorsed a Franco-German compromise on post-2013 rescues that means investors won’t automatically take losses to share the cost with taxpayers as German Chancellor Angela Merkel initially proposed.
In his speech, the French central bank chief called for an international effort to address volatility in financial flows, saying a patchwork of individual efforts to set capital controls risks displacing pressures without defusing them.
Volatility is increasing in currencies and commodities, and market shifts can exacerbate economic shocks, he said.
Noyer’s proposal underscores the danger of a surge in capital flows to emerging markets that policy makers are concerned will spark asset bubbles. Nations have adopted disparate steps to manage the risk, with South Korea embracing a tax on foreigners’ investments in its bonds and Indonesia favoring a lock-up period for overseas purchases of bills.
While one country can have an impact on an influx of overseas capital through introducing controls, the risk is that the money then flows elsewhere, putting pressure on other asset markets, Noyer said. He said that global capital markets are closely interlinked, and that some volatility may be induced by policy makers.
“In advanced economies, monetary easing, together with inhibitions on credit growth, creates a potential for future financial imbalances,” Noyer said, without specifying whether the Federal Reserve’s plan to purchase $600 billion of Treasury securities is one source of volatility.
Officials from nations ranging from Brazil to China have said the Fed’s attempt to boost U.S. growth risks sparking flows of capital to emerging markets that create asset bubbles. Noyer said it’s not good for nations to challenge each others’ monetary policies.
While the Group of 20 has begun a campaign to construct global financial safety nets, there is doubt about the consistency of the policy strategies of some of the world’s largest economies, Noyer said. He said that countries should disconnect the accumulation of record foreign-exchange reserves from managing exchange rates.
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