Bloomberg News

ECB Officials Dismiss Calls for Backstop Role to Fight Turmoil

November 15, 2011

(For more on the region’s debt crisis, see EXT4.)

Nov. 14 (Bloomberg) -- European Central Bank officials dismissed calls to step up their role in protecting the euro as outgoing Italian Prime Minister Silvio Berlusconi said the institution should act as the region’s lender of last resort.

With economist Mario Monti poised to replace Berlusconi and drive through an austerity agenda, ECB Governing Council member Jens Weidmann ruled out action by the central bank as rising borrowing costs push nations such as Italy to speed measures to stem the euro area’s turmoil.

“You won’t solve the crisis by reducing incentives for the Italian government to act,” Weidmann, who also leads Germany’s Bundesbank, told the Financial Times in an interview published yesterday. He also said that the ECB’s benchmark interest rate is “appropriate” at 1.25 percent after last month’s surprise quarter-point cut.

Weidmann echoed his colleague, ECB Executive Board member Juergen Stark, who insisted in a Swiss newspaper interview published late on Nov. 11 that the ECB will “never” be the lender of last resort. The central bank has resisted pressure to backstop the region and combat the crisis by printing money after a week when the threat of a breakup of the single currency sent borrowing costs to records and began to chip away at core countries such as France.

No ‘Guarantor’

The current crisis arose “because our common currency doesn’t have the support that a real currency must have,” Berlusconi said in a video message broadcast to the Italian nation yesterday. We “need a bank that is a lender of last resort, a guarantor of the currency that other currencies such as the dollar and sterling have.”

Italian bonds fell for a fifth week and drove yields to the highest in the euro’s history in a slump that stemmed only after Berlusconi agreed to push through austerity measures and step down. The yield on Italy’s benchmark 10-year bond eased to 6.45 percent at the end of last week after climbing to a record 7.48 percent on Nov. 9.

“The rallying cry by many investors and observers this past week was that Italy’s trouble would force the ECB into announcing a major bond-purchasing program similar to the Bank of England’s and the Fed’s,” Joachim Fels, Morgan Stanley’s chief global economist in London, wrote in a note to clients yesterday. “Barring a total meltdown of markets (which of course cannot be excluded), the ECB is not anywhere close.”

Recession Risk

European leaders’ task will be no easier as the risk of recession looms, weighing down on efforts to shore up budget deficits. The European Commission cut its euro-region growth forecast for next year by more than half on Nov. 10.

Weidmann’s comment on the interest rate being “appropriate” hinted that politicians might not get help with another rate reduction this year. The ECB on Nov. 3 unexpectedly cut its benchmark interest rate by 25 basis points.

Monti, the 68-year-old former EU competition commissioner, must present the names of his cabinet ministers to Italian President Giorgio Napolitano before he can be sworn in. He’ll face confidence votes in both houses of parliament this week. If successful, he will lead a government of mostly non-politicians charged with implementing the austerity measures passed by Berlusconi. They will try to persuade investors that Italy can trim its debt of 1.9 trillion euros ($2.6 trillion).

Greek Pledge

In Athens, the new unity government under Prime Minister Lucas Papademos said it will dedicate itself to pushing through measures decided at an Oct. 26 European summit to receive a sixth loan installment of 8 billion euros before it runs out of funds in mid-December. Greek Finance Minister Evangelos Venizelos retained his post as Greeks look ahead to elections tentatively scheduled for Feb. 19.

Markets will also be looking to Spain, where the opposition People’s Party is the frontrunner in polls ahead of next week’s election. The PP would win 45.5 percent of the vote, compared with the Socialists’ 34.2 percent, a poll in ABC showed.

Weidmann told the FT that the monetary union must either ratchet up fiscal rules under the Maastricht treaty or drive countries closer together by transferring budget policy to a European body.

The sentiment was echoed by Chancellor Angela Merkel, who in an interview with ZDF television ruled out a fragmentation of the currency area and urged “a fundamental change in our whole policy -- and it requires more Europe.”

Weidmann sidestepped a question on whether countries should be able to exit the monetary union.

“That’s not a discussion that I want to join,” he said.

In the meantime, Weidmann also ruled out central bank action involving target levels for interest rates in sovereign debt, calling all such action a violation of the ECB’s mandate and a hindrance to the central bank’s independence.

“Don’t get your hopes too high that the ECB will ride to the rescue anytime soon,” Morgan Stanley’s Fels said.

--With assistance from Andrew Davis in Rome, Marcus Bensasson, Natalie Weeks and Maria Petrakis in Athens, Esteban Duarte in Madrid, Jana Randow in Frankfurt and Grant Smith in London. Editors: Craig Stirling, John Simpson

To contact the reporter on this story: Patrick Donahue in Berlin at pdonahue1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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