Stress tests on European banks are “most definitely” needed, the International Monetary Fund’s chief economist said.
“We need to understand exactly the interaction between sovereign risks and financial risks,” Olivier Blanchard said in a Bloomberg Television interview on “Surveillance Midday” with Tom Keene today. “We need to understand the balance sheets of the banks,” he said, adding it was “very urgent.”
The European Union’s 2010 stress tests were criticized for not being stringent enough because lenders in the 27-nation region were shown by regulators to need only 3.5 billion euros ($4.9 billion) of new capital, about a 10th of the lowest analyst estimate. This year’s exams will be managed by the London-based European Banking Authority, which was created on Jan. 1 as part of an overhaul of financial supervision in the EU. The results are due to be published in June.
Asked about rising yields on Greek bonds and bills, Blanchard said ‘it’s very clear Greece has a long way to go.”
“We know they cannot afford to pay 16 percent,” he said of the cost of Greece’s two-year debt. “That’s why we’re providing financing.”
IMF officials have been saying the institution is ready to give Greece more time to repay its loan to the fund if European nations, which provided the bulk of a joint 110 million euro package, agree to do it too.
“Financing has to be there long enough that Greece can actually get out of the hole,” Blanchard said. “It’s going to be tough, it’s going to be long but we hope it’s going to happen.”
Blanchard, who earlier this week hosted a two-day conference in Washington on growth policies, said that participants have realized they have to “revisit some of the things that were very dear to our hearts before” the global financial crisis.
Speakers ranging from Nobel Prize-winning economist Joseph Stiglitz to Former European Central Bank Chief Economist Otmar Issing discussed the approach of central banks now that monetary policy has new targets, such as output and financial stability, on top of keeping inflation in check, Blanchard said.
“When you have one target, one instrument, it’s fairly easy,” Blanchard said. “When you have many targets, many instruments, many of them you’ve never used,” he said, citing capital rations as an example, “then it becomes a very complicated game.”
Blanchard said that “in a number of countries,” especially in emerging markets, there are signs that inflation is picking up.
“Once you’ve chosen an inflation target, it’s important for you in terms of credibility to actually try to achieve it,” Blanchard said when asked about central bankers’ recent concerns about inflation. “Now, maybe later on you may want to revisit the inflation target but as long as you have it, the job of a central bank it to make sure you don’t go too far away from it.”
European Central Bank President Jean-Claude Trichet took investors by surprise last week when he announced policy makers may raise the benchmark rate from a record low of 1 percent in April to combat mounting inflation pressures.
Blanchard said that inflation targets chosen in the past may have been too low and that policy makers should perhaps revisit them for the next 20 years.