Bloomberg News

IMF Renews Call for ECB to Step Up Response If Crisis Worsens

October 05, 2011

Oct. 5 (Bloomberg) -- The International Monetary Fund renewed its call for the European Central Bank to step up its response to the region’s debt crisis if it continues to threaten growth and destabilize financial markets.

The ECB “should lower its policy rate if downside risks to growth and inflation persist,” the Washington-based lender said in its biannual regional economic outlook for Europe, reiterating comments made in its World Economic Outlook on Sept. 20. “The ECB might need to reinstate some of its longer-term liquidity provision operations if stresses on interbank markets intensify further” and make an “explicit commitment” to buy government bonds “for as long as necessary,” the IMF said.

The ECB, which has lifted its benchmark interest rate twice this year to tame inflation stuck above its 2 percent limit, last month lowered its growth outlook, giving officials the option to take further action should the crisis worsen. Policy makers have already reintroduced a six-month loan to banks and committed to provide them with unlimited liquidity until the end of the year. They are also considering long-term loans and restarting covered-bond purchases, according to a euro-region central bank official who spoke on condition of anonymity.

Economists predict the ECB will lower its key rate by 25 basis points to 1.25 percent in December, the median of 34 forecasts in a Bloomberg News survey shows.

‘Severe’ Repercussions

The IMF last month cut its growth forecast for the 17- nation euro area and predicted “severe” repercussions if lawmakers fail to contain a fiscal crisis that has pushed Greece to the edge of default. European governments yesterday indicated investors may be saddled with bigger losses on Greek debt, intensifying market jitters that a second aid package negotiated in July might unravel.

“Given persistent tensions in euro-area sovereign markets and global weaknesses, downside risks remain particularly acute,” the IMF said. “Renewed concerns about policy slippages in program countries or lack of commitment to continued support of program countries at the euro-area level could amplify the shockwaves seen during the 2011 summer throughout the euro area with adverse repercussions regionally and globally.”

European stocks fell for a third day yesterday and investors shunned riskier countries’ bonds amid concern that the crisis is careening out of control. The euro has dropped 10 percent in the past five months and traded at $1.3308 at 10:15 a.m. in Frankfurt.

‘Lost Confidence’

“A lot of people have lost confidence in whether Europe is going to make it,” Deutsche Bank AG Chief Executive Officer Josef Ackermann said yesterday, after Germany’s biggest lender scrapped its profit forecast and announced 500 job cuts and further writedowns of Greek bond holdings.

“My strong conviction is yes, we will, but it will take much longer than some people think and that will have an impact on the real economy but also an impact on the financial markets,” Ackermann said.

The IMF forecasts euro-area growth of 1.6 percent this year and 1.1 percent in 2012, with the Portuguese and Greek economies remaining in recession until mid-2012 and early 2013 respectively. Capital buffers remain low in a “significant number” of euro-region banks and should be strengthened, the IMF said.

“Crisis management in the euro area needs to go beyond its current approach to secure success,” it said. “Euro-area leaders need to spell out and recommit to a common vision of how the euro area is expected to function in the future. This is essential to anchor market expectations and dispel the prevailing uncertainty.”

Trichet’s Call

ECB President Jean-Claude Trichet, who helped bring the euro into being, yesterday urged European leaders to work toward more political unity and repeated his call for the eventual creation of a European finance ministry.

Belgian Finance Minister Didier Reynders has already signaled support for the creation of an institution with the power to guide national fiscal policies and issue euro bonds, while his German counterpart Wolfgang Schaeuble said on Sept. 16 that crisis management has to be guided by Europe’s current rulebook.

“Europe suffers from a coordination problem among fiscal authorities and between the monetary authority and governments,” Andrew Bosomworth, executive vice-president and senior portfolio manager at Pacific Investment Management Company in Munich, said last week. “Whatever the ECB does, ultimately it can only provide a bridge to a destination shaped by governments’ fiscal policy.”

--Editors: Matthew Brockett, Simone Meier

To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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