Indebted Nations Must Cut to Thwart Crisis, ECB’s Liikanen Says
July 16, 2011, 12:21 PM EDTBy Kati Pohjanpalo
(For more on the European debt crisis, see {EXT5 <GO>}.)
July 16 (Bloomberg) -- Developed nations with unsustainable debt must balance their budgets to prevent the outbreak of a new financial crisis, European Central Bank Governing Council member Erkki Liikanen said.
“Government debt is a problem for all developed countries,” Liikanen, who began his second term as governor of the Bank of Finland this week, said at a seminar in Kokkola, western Finland, today. “We must stop it from coming to a head, to prevent the financial crisis starting again. All countries need a credible program to balance public finances to help stabilize the situation gradually.”
Europe’s debt crisis has entered a new phase and requires a clear policy response to prevent contagion from threatening the single currency, ECB incoming President Mario Draghi said in a speech on July 13 in Rome. Both Standard & Poor’s and Moody’s Investors Service warned this week they may lower the U.S.’s top-level credit rating amid the absence of an agreement to lift the nation’s debt ceiling.
Investors are concerned that indebted developed countries can no longer drive economic growth by boosting public spending, Liikanen said. The only choice for nations with unsustainable debt burdens is to balance their budgets, he added.
Rating Downgrades
Ireland’s credit rating was cut to junk this week by Moody’s and Italy’s 10-year bond yields soared to a euro-era record, fueling concern the region’s debt crisis will spread. Greece, which with Ireland and Portugal has received a European Union-led rescue, was downgraded to CCC by Fitch Ratings, the lowest grade for any country.
European political leaders are at odds with one another and with the ECB over demands by Germany and Finland that private investors bear some of the burden for a second Greek bailout. Euro-area leaders will hold a special summit on July 21 to discuss the crisis and future financing for Greece, European Union President Herman Van Rompuy said yesterday.
“The crisis cannot be resolved in an economically or morally sustainable way without the participation of all those involved,” Finnish Finance Minister Jutta Urpilainen said at the seminar today. “Making taxpayers liable for debts that they haven’t decided to take is causing the formation of a new crisis.”
Finland, one of the euro area’s six AAA-rated countries, will not take part in any future bailouts unless it receives collateral for the loans, Urpilainen added, reiterating the government’s stance.
--Editors: Jeffrey Donovan, Will Hadfield
To contact the reporter on this story: Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net.
To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net.
