(Updates with Liikanen comments from sixth paragraph. For more on the European debt crisis, click on EXT4 <GO>.)
Oct. 14 (Bloomberg) -- European Central Bank council member Erkki Liikanen said growth prospects in the 17-nation euro area are marred by “high uncertainty” as the debt crisis threatens to engulf the region’s banks.
“The uncertainty related to growth prospects is high, and a substantial weakening in economic activity cannot be ruled out,” Liikanen, who also heads the Bank of Finland, said today at a hearing in parliament in Helsinki.
The ECB has shelved interest rate increases and resumed government bond purchases in an effort to support some of the region’s most indebted nations. ECB President Jean-Claude Trichet told Bloomberg Television this week that it’s now up to governments to solve Europe’s debt woes as the crisis spreads to the region’s banks.
“With sovereign debt problems continuing, it has become more difficult for European banks to access finance and the price of financing has risen,” Liikanen said. “Banks should seek to raise additional capital from private sources in the first place. Capital injections possibly made by governments must take place in exchange for stock or ownership.”
Policy makers earlier this month pushed back a debt-crisis summit to Oct. 23, as leaders try to solve a crisis that started in Greece two years ago and is now threatening to tip the global economy into recession. The ECB has shouldered the main burden of keeping Europe’s banking system from collapsing throughout that period.
ECB Bond Purchases
The Frankfurt-based central bank’s purchases of sovereign bonds made on the secondary market at market price are temporary and intended to ensure the transmission of monetary policy, Liikanen said.
“The ECB intends to keep the bonds it buys until maturity,” Liikanen said. “The bonds are valued at market price” on the balance sheet “for as long as all obligations are serviced, including interest payments and repayments of capital.”
--Editors: Tasneem Brogger, Jonas Bergman
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