Friday 20 October 2017

Trichet calls for ‘maximum’ flexibility of region’s rescue fund

ECB president Jean-Claude Trichet. Photo: Bloomberg News
ECB president Jean-Claude Trichet. Photo: Bloomberg News

European Central Bank President Jean-Claude Trichet said European governments should consider extending and broadening the region’s bailout fund to help fight the fiscal crisis.

“We’re calling for maximum flexibility and maximum capacity, quantitatively and qualitatively,” Trichet told reporters at an event in Frankfurt late yesterday, responding to a question whether the European Financial Stability Facility should be able to buy government bonds.

The ECB is putting pressure on governments to step up their response to the region’s debt crisis after market turmoil forced Ireland last month to become the second nation after Greece to seek external aid.

ECB Vice President Vitor Constancio said on December 10 that an increase of the €440bn rescue fund and more flexibility would be “helpful.”

“In some countries, there remain significant concerns about the sustainability of their own fiscal positions,” Trichet said. “Each country has to put its own house in order. This is no time for complacency in any respect.”

Governments across the region have embarked on programs to bring deficits back in line with the European Union’s budget rules. Ireland last week pledged spending cuts worth €6bn in 2011 ranging from child benefits to government salaries to push down the country’s budget shortfall.

Restoring confidence

“I am sure that the program is suited to bring about a sustainable stabilisation of the Irish economy and soothe tensions in financial markets that are associated with the Irish fiscal problems and the reorganisation of its banking sector,” Trichet said.

“The program will also contribute to restoring confidence and safeguarding financial stability in the euro area as a whole.”

While finance ministers agreed in October to toughen sanctions for breaches of European fiscal rules, they stopped short of more automatic penalties that the ECB and countries including Germany had demanded.

“These proposals in our view do not yet represent the quantum leap in economic governance that is needed to be fully commensurate with the monetary union we have created,” Trichet said. Sanctions should be applied in a “quasi-automatic” way and include fines and “possible limitations of voting rights for member states in persistence violation,” he said.

Euro bonds

Luxembourg Prime Minister Jean-Claude Juncker and Italian Finance Minister Giulio Tremonti have called for the creation of euro bonds to help debt-burdened nations.

The idea is “intellectually attractive,” EU Economic and Monetary Affairs Commissioner Olli Rehn said on December 6, and Greek Prime Minister George Papandreou said it’s time to “seriously discuss” it.

“In the previous period, the ECB had said that it was not necessarily appropriate to have such type of bonds,” Trichet said. “We were very clear on that. At this stage, there is no new position on the Governing Council of the ECB.”

The Frankfurt-based central bank on December 2 delayed its withdrawal of unconventional measures, extending unlimited liquidity supply for the financial sector into the second quarter of 2011. The ECB that day also kept its benchmark interest rate at a record low of 1pc.

Two tools

“We consider the two tools we’re utilising, the standard measures, the interest rates, and the non-standard measures, as being relatively independent,” Trichet said. “We could go up and down with one tool and let the other unchanged and do the same with the other tool.”

The ECB is seeking ways to reduce banks’ dependence on emergency-liquidity measures. A “small number of institutions” is “excessively reliant on central bank liquidity,” it said in a report published last week.

“We look at all elements that would permit us to be back at a normal situation, which calls for our own non-standard measures to be progressively phased out” and “for banks to have a normal attitude” towards ECB liquidity, Trichet said. “We try to help the overall move in this direction. Of course we have to take into account reality.”

Trichet said the ECB is “extraordinarily attached” to keeping its monetary policy stance “unchanged” at the moment. He also said he has “no particular comment” on whether the ECB is considering raising its capital base to meet increasing risks as a result of its government-bond purchases.

Bloomberg

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