ECB's Noyer says central banks can’t back insolvent issuers
European Central Bank governing council member Christian Noyer said central banks should avoid bailing out insolvent borrowers as he sought to set limits on market intervention by policy makers.
“Recent episodes clearly highlight what the markets may expect from central banks: resolute action to deflate positive and negative price bubbles,” Noyer said today at a speech in Paris.
“This does not mean that markets and market participants should always expect central banks to make such interventions.”
The ECB has purchased €63.5bn of sovereign bonds since the week of May 10 as the Frankfurt-based central bank sought to calm markets roiled by a crisis of confidence in euro-area governments including Ireland, Spain and Portugal.
The bond purchases, which have exceeded 1 billion euros only once in each of the past 13 weeks, have been aimed at keeping markets functioning rather than propping up countries that can’t repay their debts, Noyer says.
“Similar to its lender of last resort function, the role of buyer of last resort that central banks can take on must not extend to insolvent issuers,” he said.
It “must not, at the risk of causing a very dangerous moral hazard, be systemic each time a problem arises,” he said.
While the US Federal Reserve and the Bank of England are considering a renewed round of asset purchases, the ECB has so far suggested reluctance to do so, contributing to a 9pc rise in the euro against the dollar since the beginning of September.