(Updates with German position from eighth paragraph. For more on the European debt crisis, see EXT4.)
Nov. 15 (Bloomberg) -- The European Central Bank should set an upper limit for sovereign bond yields to contain a fiscal crisis that’s threatening the euro, said Peter Bofinger, an economic adviser to the German government.
“We are in an emergency situation; this isn’t plastic surgery, this is emergency care,” Bofinger, who is also a professor at the University of Wuerzburg, Germany, said at a conference in Frankfurt today. “If worst comes to worst, the ECB has to act before the financial system falls. And if they act, they should act properly and set an upper limit for sovereign yields.”
ECB policy makers, who cut interest rates this month, have said they can’t do much more to stem the region’s sovereign debt crisis, suggesting they are reluctant to significantly ramp up bond purchases to lower borrowing costs in distressed euro countries. Bond yields in Italy, the third-largest economy in the 17-nation region, have surged above the 7 percent level that led Greece, Portugal and Ireland to seek bailouts from the European Union and International Monetary Fund.
“It’s naive to believe that Italy can solve its problems on its own,” Bofinger said. “Structural reforms can’t be implemented overnight. The euro region only has a chance if it fights united.”
Mario Monti, Italy’s premier-in-waiting after Silvio Berlusconi’s resignation on Nov. 12, struggled to get political parties to agree to participate in his so-called technical Cabinet during talks in Rome yesterday.
With concerns growing about Italy’s ability to rein in the region’s second-biggest debt burden, investors are losing faith in other euro-area governments.
The cost of insuring French bonds climbed to a record and Spanish yields rose at an auction today.
The average yield on Spain’s 12-month debt was 5.022 percent, compared with 3.608 percent when securities of the same maturity were sold on Oct. 18. The yield on the country’s 10- year bonds rose 21 basis points to 6.32 percent.
German policy makers in particular are opposed to cranking up the ECB’s printing press to bring down borrowing costs. While the central bank is intervening in bond markets, it has so far spent just 187 billion euros ($253 billion) in 18 months and sterilizes the purchases by draining an equal amount from the banking system.
Memories of Hyperinflation
ECB council member Jens Weidmann, who also leads Germany’s Bundesbank, has evoked memories of the hyperinflation that crippled the economy after World War I as a reason not to engage in so-called monetary financing, and Executive Board member Juergen Stark has said the ECB will “never” become a lender of last resort to governments because it would undermine its independence and credibility to fight inflation.
German Finance Minister Wolfgang Schaeuble said yesterday that the ECB must not finance indebted states and governments should rely on the European bailout fund until they get budgets under control.
German Economy Minister Philipp Roesler on Nov. 11 also rejected deploying the ECB as a lender of last resort. Such a role for the central bank would remove pressure on euro states to reduce debt, opening the door to inflation, he said. “And you would never be able to shut it again.”
Still, Thomas Mayer, chief economist of Deutsche Bank AG in Frankfurt, said another reduction in the ECB’s benchmark interest rate wouldn’t help Italy.
“Italy is the frontline, where it will be decided, whether the euro will continue to exist in its current form or whether it will change,” he said. “What Italy needs is a reduction of bond yields. If that doesn’t happen, Monti will fail. What we need is urgent action that only the ECB can take.”
--Editors: Matthew Brockett, Simone Meier
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