European policy makers need to allow bailout funds to lend directly to banks and should consider joint-debt financing, European Central Bank Governing Council member Ignazio Visco said.
The existing aid mechanisms for countries facing soaring bond yields “must be made more effective,” Visco, who is also governor of the Bank of Italy, said in a speech in Rome today. “There must be the possibility of intervening promptly in the securities markets and directly in favor of banks, with procedures that are more flexible and less penalizing for the beneficiary countries that respect the rules of the union.”
European Union policy makers are seeking ways to shore up the region’s banking system and bring down borrowing costs with foreign investors continuing to shun the debt and banks of so-called peripheral nations. Germany, the biggest economy of the 17 nations using the euro, has resisted calls to allow the EU’s bailout mechanisms to lend directly to banks and has opposed the possibility of joint issuance of debt as a way to bring down borrowing costs.
Bond Redemption Fund
Visco indicated that he favored joint issuance of debt or at least a bond-redemption fund to pool debt in excess of the EU limit of 60 percent of gross domestic product.
“The availability of more common resources and also the constitution -- proposed in several quarters -- of a fund to which to transfer sovereign debt in excess of a uniform threshold, to be redeemed gradually according to a clearly defined calendar and procedures, are the substance of a form of fiscal union that cannot be uncoupled from cogent rules nor from powers of control and intervention.”
Italian Prime Minister Mario Monti called on Germany to “reflect deeply but quickly” on steps to stabilize the European economy such as enabling direct lending to troubled banks or setting up a European-finance bank backstop system.
“Countries that are at the core of the system and which have had the huge merit of instilling the culture of stability to the EU in the first place, most notably Germany, should really reflect deeply but quickly on these aspects,” Monti said by video link to an EU conference in Brussels today. “Europe should really accelerate the efforts, as the European Commission is doing, in order to limit the contagion.”
Visco, in his keynote speech at the Bank of Italy’s annual meeting, said that growing economic imbalances caused by “political inertia, disregard of the rules and mistaken economic decisions” are putting the “entire European edifice at risk.” He called for a tighter political and fiscal union.
“We feel the absence of some of the fundamental characteristics of a federation of states: decision-making processes that favor the adoption of far-sighted policies in the general interest; shared public resources for financial stability and growth; rules that are truly accepted; and commonly agreed and timely measures for the financial system and banks,” Visco said.
He also called for “less penalizing” measures for countries receiving assistance, while warning of moral hazard from being overly generous. Current yield spreads “impede the correction operation of the single monetary policy” and are risks to “financial stability” and an “obstacle to growth.”
ECB President Mario Draghi told an EU parliamentary committee today that the central bank will continue to keep supporting solvent euro-area lenders. The Frankfurt-based ECB provided more than 1 trillion euros ($1.24 trillion) in three-year loans to banks in operations in December and February.
Visco said there’s evidence that Italian banks, aided by the cheap ECB loans, are starting to provide more liquidity to the euro region’s third-biggest economy, which is mired in its fourth recession in a decade. He also said lenders had stepped up purchases of Italian government debt.
The ECB’s lending helped “partially” restore liquidity to Italy’s debt market, Visco said. Net purchases of the debt by banks was “modest or negative” late last year, while it “amounted to 70 billion euros in the first quarter of 2012, about a third of it at maturities of less than a year.”
While lending to businesses contracted sharply in December and stagnated in the first quarter of this year, “there are signs that the improvement in banks’ liquidity is helping to foster the supply of credit,” Visco said.
Surveys show “some easing of lending terms” compared with the last three months of 2011, he said.
Visco also praised Monti’s government for taking “rapid and decisive” action to improve public finances to bring the budget deficit within the EU’s limit of 3 percent of GDP next year. That effort came partly by raising taxes to a “level incompatible with rapid growth,” he said.
The fallout from Monti’s austerity measures, coupled with a forecast recession in the single-currency region, will lead the Italian economy to contract around 1.5 percent this year, the central-bank governor said. A recovery is possible next year if Italy continues its structural reforms and Europe’s shows more “cohesion” in its response to the debt crisis, Visco said.