Aiding Italy on Borrowing Costs Isn’t Justified, Weidmann Says

Italy’s borrowing costs don’t justify asking the euro area’s rescue fund for help, Bundesbank President Jens Weidmann said.

“Of course I can understand why a country would want to lower its refinancing costs,” Weidmann said in an interview with Boersen-Zeitung e-mailed to Bloomberg News by the German central bank he heads. “But because of the last-resort aspect of financial aid in the currency union, that alone can’t be a justification for granting it.”

“If Italy stays the course on reforms, it’s on a good path,” Weidmann told the German newspaper. Asked whether the euro area’s third-largest economy needs to tap the planned European Stability Mechanism, he said, “No, I don’t see Italy in that situation.”

The European Central Bank Governing Council member’s comments indicate German reluctance to allow the government-run bailout funds to buy Italian bonds to insulate that country from the debt crisis. Italian Prime Minister Mario Monti has sought a “debt shield” against spillover from the crisis at Spain’s banks, which are getting as much as 100 billion euros ($122 billion) in rescue loans.

The European bailout for Spanish banks would be more effective if aid conditions extended to the country’s economy, Weidmann said. He cited high unemployment and problems in Spain’s regions as signaling a “considerable need” for further action, according to the interview.

Beyond Banks

“If investors saw that the conditions for the aid program go beyond the banking sector, that would have a positive effect on the bond market,” Weidmann said, referring to Spain. The Spanish government’s recent policy changes indicate that it understands the need for broad reform, he said.

Spanish Prime Minister Mariano Rajoy outlined 65 billion euros in social-welfare cuts and sales-tax increases on July 11 in a bid to retain financing and prevent a meltdown of the fourth-biggest euro economy. The measures are Rajoy’s fourth austerity package in seven months in office.

While setting up a European bank supervisor would be “helpful,” any “banking union” must avoid pooling risk by shifting the result of wrong economic and financial policies to banks’ balance sheets, Weidmann told Boersen-Zeitung.

“We should never underestimate the complexity and the risks of such an undertaking,” he said.

Loans to Spain

Loans to Spain will go via the government’s FROB bank-restructuring agency and the aim is to convert them into direct injections once the setup of a single European bank supervisor makes that feasible, Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro-area finance ministers, said on July 10.

On Greece, Weidmann said stretching the timeline for the country’s economic overhaul under the conditions of its two bailouts “won’t increase the political acceptance” of the austerity measures. Ireland and Portugal have achieved “remarkable progress” while receiving rescue funding, he said.

With the debt crisis in its third year, Weidmann said he is concerned that the ECB can’t meet expectations to stem the turmoil “because the underlying problems can’t be solved with ever more liquidity.” Sovereign-bond buying by the ECB “weakens the incentives for solid budget policies,” he said.

The worsening of the euro area’s economic outlook and decline in oil prices justify the July 5 interest-rate cut by the ECB, Weidmann was cited as saying in a separate interview in the Dutch newspaper Het Financieele Dagblad today.

June Summit

European government leaders caused damage by leaving room for interpretation in the outcome of their last summit in June, giving the impression the meeting was about only shared liability for banks, the Amsterdam-based newspaper quoted him as saying.

Euro-area nations “should discuss giving up sovereignty with the same openness as the question of how to resolve the debt problem collectively,” he told the newspaper.

Weidmann backed giving the German constitutional court “a bit more time” than usual to consider the validity of lawsuits aimed at blocking German participation in the European Stability Mechanism, the euro region’s permanent rescue fund that was originally scheduled to start up on July 9.

Quick German ratification of the ESM “can’t create lasting calm in the markets” on its own and the temporary European Financial Stability Facility has the capacity to aid Spain and Cyprus, Weidmann told Boersen-Zeitung.

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