European Central Bank Governing Council member Erkki Liikanen signaled governments shouldn’t expect further ECB action to fight the debt turmoil, and said officials mustn’t wait too long to unwind crisis-fighting tools.
“We’ve done a lot,” Liikanen said in a Bloomberg News interview in Helsinki yesterday, citing the central bank’s record-low interest rates and three-year loans. “We must also decide how and when we exit in a controlled and timely manner,” he said, declining to elaborate.
Liikanen echoed ECB President Mario Draghi’s call to governments to make the most of a lull in the turmoil to reform economies and fix public finances. The ECB has borne the brunt of fighting the debt crisis by slashing borrowing costs to 1 percent, purchasing government bonds of debt-burdened nations and swelling its balance sheet with measures including a record 1 trillion euros ($1.3 trillion) in three-year loans to banks.
ECB council member Jens Weidmann said on March 13 that policy makers are already discussing ways to withdraw some of the emergency cash they injected into the banking system to fight the crisis. The “timeframe depends on several things, including how the environment develops,” he said.
“The ECB has done its part, the governments must do theirs,” Liikanen said. “We have been able to produce, from a market viewpoint, a decisive change in market sentiment. For the fiscal side, for the deficits, for the long-term fiscal debt, it’s in the hands of governments and that belongs to them -- and only them.”
The euro was little changed against the dollar after the remarks, trading at $1.3066 at 10:14 a.m. in Frankfurt. The Stoxx Europe 600 Index advanced 0.3 percent.
“It’s right that the ECB steps back and moves to the sidelines,” said Nick Kounis, head of macro research at ABN Amro NV in Amsterdam. “Their actions are buying time and ultimately they’re only going to be successful if various players use that time to make the fundamental steps necessary.”
Liikanen, who also heads the Bank of Finland, said the ECB’s loans, which pushed down bond yields, supported a stock market rally and helped bolster confidence, have given governments “room to be more efficient” in implementing reforms. Investors are watching for progress and it’s “important that no country creates negative surprises,” he said.
Euro-area finance ministers have authorized the region’s bailout fund to raise money for Greece’s bond exchange, the first step in releasing funds from a 130 billion-euro rescue package. The assistance brings to at least 386 billion euros the sums spent or committed to save Greece, Ireland and Portugal and to insulate Europe from a ruinous financial cascade.
The International Monetary Fund yesterday approved a 28 billion-euro loan for Greece as part of a second bailout that requires more austerity and an overhaul of the nation’s economy.
Liikanen declined to comment on the likelihood that Portugal and Ireland may need further rescue aid, as suggested by his former colleague, Lorenzo Bini Smaghi.
“We have just concluded a resolution to Greece,” he said. “We have just decided on a governance package, which is now for the most part implemented. We have just been active in monetary policy. We must just hold the line.”
Liikanen said the alternative to austerity measures in some euro-area countries is “still much worse” and getting public finances in order gives governments “more freedom and the possibility to act.”
While the economic slowdown is temporary, the sovereign debt crisis will remain the main drag on growth in the euro area, Liikanen said. The ECB forecast last week that the 17- nation euro-area economy will contract 0.1 percent this year and grow 1.1 percent next year. Euro-region inflation may average 2.4 percent and 1.6 percent this year and next, it said.
“Obviously we’re still in a mild recession in Europe and the economic outlook is pretty dire,” ABN Amro’s Kounis said. “But they’re not as relaxed about the inflation picture as they were before.”
The ECB policy maker played down concerns that Target2 imbalances pose a risk to euro-area stability that have been voiced by Germany’s Weidmann in a letter to Draghi. The ECB’s so-called Target2 system calculates debts between the euro region’s central banks.
“Target2 balances don’t create any standalone risk,” Liikanen said. “The real issue is of course that we have too wide imbalances inside Europe.”
The risks to the ECB balance sheet are managed by applying haircuts to different asset classes and marking to market the collateral the ECB takes in exchange for loans, he said.
“Of course when you expand your balance sheet, when you lend more, your risks are also increasing, and the question is, are they managed?” Liikanen said. “Yes they are.”
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