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ECB Policy Makers Say They Can’t Do Much More to Stem Crisis

ECB Governing Council Member Klaas Knot
ECB Governing Council member Klaas Knot said, “Not much more can be expected from us, it’s up to the governments.” Photographer: Daniel Acker/Bloomberg

European Central Bank policy makers said the bank can’t do much more to stem the region’s sovereign debt crisis, suggesting they are reluctant to significantly ramp up bond purchases to lower Italy’s borrowing costs.

“Not much more can be expected from us, it’s up to the governments,” Governing Council member Klaas Knot, who heads the Dutch central bank, told lawmakers in The Hague today. Three other policy makers have also publicly rejected calls for more ECB intervention and two further officials, who spoke on condition of anonymity, said the central bank has no plans to make its purchase program unlimited.

Bond yields in Italy, the third-largest economy in the 17-nation euro region, have surged above the 7 percent level that led Greece, Portugal and Ireland to seek bailouts from the European Union and International Monetary Fund. With politicians still unable to find a solution to the debt crisis that has raged for two years, the ECB is being asked to step into the breach to hold Europe’s monetary union together.

The central bank, which cut interest rates last week, lends banks as much cash as they need and has announced a second round of covered-bond purchases. That 40 billion-euro ($55 billion) program started yesterday, said two people familiar with the matter.

Government Bonds

In addition, the ECB has so far bought 183 billion euros of government bonds from debt-strapped nations, purchases is says are aimed solely at ensuring its interest rates are transmitted on financial markets. To prevent the purchases from fueling inflation, it sterilizes them by draining the same amount of money they create from the banking system.

Knot said the ECB can maintain its bond buying as long as it can continue to remove the same amount of money from the system. “The bigger the portfolio, the more difficult that becomes,” he said. “Interventions can only have a temporary and very limited effect,” Knot added.

Rabobank economist Elwin de Groot estimates there is a “natural limit” of 300 billion euros in government bond purchases the ECB can sterilize.

As yields soar to euro-era highs above 7 percent in Italy, some politicians and economists have called on the ECB to commit to buying as many bonds as it takes to calm markets.

Irish Finance Minister Michael Noonan said this week the ECB must stand ready to provide a “firewall” as the debt crisis escalates.

Monetary Financing

Bond buying with the aim of bailing out a government is monetary financing and prohibited by the euro’s founding treaty, Bundesbank President Jens Weidmann said this week. He cited Germany’s experience of hyperinflation after World War I as a reason why such action should never be contemplated again.

“That’s absolutely, clearly beyond the mandate of the central bank,” Praet said in comments posted on the Debating Europe website today.

The ECB is “not the lender of last resort and I wouldn’t advise European governments to ask the ECB to become the lender of last resort,” Stark said in Frankfurt last night. “This will mean that the ECB will immediately lose its independence.”

The debt crisis is pushing the economy into recession. The European Commission today slashed its euro-area growth forecast for next year to 0.5 percent from 1.8 percent.

The ECB on Nov. 3 cut its benchmark interest rate by a quarter percentage point to 1.25 percent to boost growth, and some economists expect another step next month.

“The effect of interest-rate cuts in the current situation is limited,” Knot said.

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