Bloomberg News

ECB’s Weidmann Says Europe Must Be Ready If Debt Crisis Worsens

February 24, 2012

(For more debt-crisis news, see EXT4. For G-20 news, see GMEET.)

Feb. 24 (Bloomberg) -- European Central Bank Governing Council member Jens Weidmann said Europe must prepare for a potential worsening of the euro region’s sovereign debt crisis even after Greece secured a second bailout package this week.

“A crucial requirement now is to prepare for the eventuality of a further escalation of the crisis by initiating appropriate ring-fencing measures,” the Bundesbank President said in a speech prepared for delivery in Mexico City today. “The resilience of the banking system is to be increased by imposing additional capital buffers” and leaders will decide in March “whether it is necessary to increase” the firepower of the region’s rescue funds “even further,” he said.

The region’s debt turmoil, which originated in Greece in 2010, has driven up bond yields in other euro countries and led some investors to speculate about the potential for highly- indebted countries to abandon the single currency. Greece must deliver the fiscal and economic policies it promised to qualify for earmarked assistance, Weidmann said before a two-day meeting of finance officials from the world’s 20 biggest economies.

The comments come as Citigroup Inc. economists said in a report today that Portugal may need a 50 percent cut in the nominal value of its government debt this year or next to return to sustainable public finances.

‘No Guarantees’

“There are no guarantees that the path being taken will lead to success,” German Finance Minister Wolfgang Schaeuble said in a Feb. 23 letter to lawmakers, referring to the Greek bailout. “It may also not be the last time the German Bundestag has to consider financial aid for Greece.”

Greece can’t be forced to comply with its adjustment program, Weidmann said. Still, “it should be clear that no further disbursements will be warranted if Greece fails to keep its side of the bargain,” he said.

While European officials will push fellow Group of 20 nations to commit fresh cash to the International Monetary Fund to help defuse the crisis, other countries, including the U.S. and Canada, say Europe must first strengthen its firewall to prevent debt levels of countries such as Italy and Spain from becoming unsustainable.

European leaders will meet in Brussels March 1-2 to review the mechanics of the 500 billion-euro ($670 billion) permanent rescue fund, the European Stability Mechanism. The fund, to be implemented in July, one year earlier than originally planned, was set up to aid European Union member states that need help meeting debt payments.

Building a Firewall

While some officials and the European Central Bank favor combining the permanent fund with the temporary European Financial Stability Facility to produce a 750 billion-euro firewall, Germany has yet to show its hand.

“The crisis cannot be resolved solely by throwing money at it,” said Weidmann. “While money can buy us time to tackle the crisis, it is imperative that we use that time in order to address its root causes.”

Germany is doing a “great deal” to help euro-area countries and “the bulk of the containment measures rely heavily on Germany’s financial support and hence its economic strength and fiscal soundness,” Weidmann said. Europe’s largest economy will continue to bear “a disproportionately large share” of the financing needed to shield the common currency by virtue of its top credit rating and the confidence it enjoys among investors, he said.

The impact of the debt crisis on the German economy has been “rather limited” so far and growth should “pick up soon,” Weidmann said.

--With assistance from Brian Parkin in Berlin. Editors: Paul Badertscher,

To contact the reporters on this story: Jana Randow in Mexico City at jrandow@bloomberg.net; Rainer Buergin in Mexico City at rbuergin1@bloomberg.net

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


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