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ECB as Lender of Last Resort Would End Crisis for Silva

ECB as Last-Resort Lender Will End Crisis for Portugal
Pedestrians pass through the Augusta Arch in Lisbon, Portugal. Portugal’s economy will shrink 3 percent next year, the European Commission forecast yesterday. Photographer: Mario Proenca/Bloomberg

The European Central Bank can stop the spread of the continent’s financial crisis with “foreseeable, unlimited” purchases of Italian and other government bonds, Portuguese President Anibal Cavaco Silva said.

“The European Central Bank has to go beyond a narrow interpretation of its mission and should be prepared for foreseeable intervention in the secondary market, not as the central bank has done up to now,” Cavaco Silva said yesterday in an interview at Bloomberg headquarters in New York. He said government leaders are unlikely to move fast enough to find solutions.

“It has to be able to be a lender of last resort,” said Cavaco Silva, 72, who as Portugal’s prime minister presided over the 1992 signing of the Maastricht Treaty, which cleared the way for the euro common currency. “It has to be a foreseeable, unlimited intervention.”

Italian 10-year bond yields this week climbed to a euro-era record of 7.48 percent, surging past the 7 percent level that led Greece, Ireland and Portugal to seek international bailouts. Ten-year Italian rates fell to 6.42 percent today, after yesterday’s successful auction of one-year bills.

ECB Purchases

Such ECB purchases in the secondary market “would stop speculation, would stop doubts about the future value of those Italian or Spanish or Portuguese or Irish bonds,” the president said. “The real firewall is in the European Central Bank.”

He said the ECB won’t convince investors of its commitment if it continues “as the central bank has done up to now, saying ‘I don’t like it, but I’m forced to buy some Italian bonds.’”

The ECB has spent about 183 billion euros ($252 billion) since it started a government bond purchase program in May 2010, resuming its buying in August after a four-month hiatus this year. ECB Governing Council member Klaas Knot of the Netherlands said yesterday the central bank can’t do “much more” to stem the 17-nation euro region’s debt crisis.

Knot is the latest ECB policy maker to signal the central bank is unwilling to significantly ramp up its bond purchases to calm financial markets. ECB Executive Board member Peter Praet of Belgium and council member Jens Weidmann of Germany have also said the ECB cannot legally buy bonds to bail out a debt-strapped member state.

Default Insurance

The cost of insurance against default on Italian government bonds eased to 569 basis points yesterday from the previous day’s record 571. That compares with 1,072 basis points for Portuguese debt, 749 for Irish bonds and 93 for German bunds.

Investors are demanding 974 basis points, or 9.74 percentage points, in additional interest today for Portuguese 10-year debt relative to comparable German debt, down from a record 1,071 basis points in July.

Portuguese lawmakers approved the government’s 2012 budget proposal in an initial vote today, said Assuncao Esteves, president of the country’s parliament. A final vote is scheduled for Nov. 30, according to the parliament’s website.

Portugal is raising taxes, cutting pensions, and reducing government workers’ pay to comply with the terms of the 78 billion-euro aid package it received from the European Union and the International Monetary Fund in May. Portugal is committed to meeting terms of the bailout, though the country’s austerity should be eased by bringing capital requirements on Portuguese banks in line with rules for other countries’ lenders, Cavaco Silva said.

Portuguese Banks

By forcing Portuguese banks to lift Core Tier 1 capital levels to 9 percent by year-end, while other European banks have until mid-2012, the bailout is imposing unnecessary hardship on the economy, the president said.

“The deleveraging is too strong and too fast,” said Cavaco Silva. “It would be reasonable to be more gradual, and we hope the troika will understand this,” referring to the EU, IMF and ECB officials who review Portugal’s compliance. It’s not a renegotiation of the bailout agreement, he said, adding “no, not at all, that’s not a question.”

Cavaco Silva, an economist with a doctorate from the University of York in England, entered politics as finance minister in 1980 and 1981. He won the leadership of the Social Democratic Party in 1985 and served as prime minister from that year until 1995, the longest tenure of any democratically elected prime minister in Portugal.

2006 Win

He won the presidency in 2006, sharing the stage with Socialist Prime Minister Jose Socrates, whose minority government fell in March after he failed to win support for deficit-cutting measures.

Prime Minister Pedro Passos Coelho, a Social Democrat elected in June, is committed to reducing the budget deficit to 5.9 percent of gross domestic product in 2011 from last year’s 9.8 percent, and to 4.5 percent in 2012 before returning to the 3 percent limit set by the EU for countries using the euro.

Passos Coelho yesterday said the ECB shouldn’t pay for some countries’ “indiscipline and irresponsibility,” and that there isn’t sufficient consensus in Europe to change the central bank’s mandate. The ECB’s interventions as they stand have guaranteed some financial stability, he said in parliament.

Portugal’s economy will shrink 3 percent next year, the European Commission forecast yesterday. It would be one of only two countries with declines in GDP, the other being Greece with a 2.8 percent drop, the commission said, while the euro area expands 0.5 percent. Portuguese GDP is forecast to fall 1.9 percent this year, the commission said.

Benchmark Index

The country’s benchmark PSI-20 Index has tumbled 26 percent this year, compared with a 13 percent decline in the Stoxx Europe 600 Index and a 22 percent drop in Italy’s FTSE MIB Index.

Portugal’s government, which forecasts a 2.8 percent GDP decline for next year, sees a 1.2 percent recovery in 2013, paving the way for it to return to the markets when the three-year bailout program ends. Whether that will happen on time is impossible to predict, Cavaco Silva said.

“I can’t say that Portugal will be able to go to the market at the end, nobody can say that,” he said. “Nobody could anticipate what is happening now in Italy.”

Still, according to decisions at a European summit in June, Portugal will qualify for continued aid as long as it’s complying with the terms of the bailout agreement, the president said. He’s confident Europe’s leaders will make decisions in the future that will get the region through the crisis, he said.

“I used to say that at the end, in the 25th hour, the wisdom of the leaders would come up,” Cavaco Silva said. “It has always been like that.”

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