THE EUROPEAN Central Bank (ECB) stepped up demands for a tougher political response to the sovereign debt crisis as it warned in a new review that the economic situation remains “fraught with risks” for financial stability.
Despite the increasing clamour for deeper measures to tackle the erosion of investor confidence in highly-indebted euro countries, French President Nicolas Sarkozy has backed German Chancellor Angela Merkel in her resistance to the issuance of sovereign bonds with a common euro zone guarantee. As debate intensifies, there is little agreement over the steps now required to bring the crisis to heel amid pressure on Portugal, Spain, Belgium and Italy.
ECB deputy chief Vitor Constancio said an enlargement of the €750 billion bailout fund would be helpful. This stance mirrors the public position of Bundesbank chief Axel Weber, who has opposed the ECB’s decision to buy bonds from distressed countries such as Ireland.
Responding on Bloomberg television to the question of whether the bailout fund might be used to buy sovereign bonds, Mr Constancio said more flexibility in euro zone resources would be helpful. He was speaking after the ECB published its twice-yearly financial stability review in which it expressed concern about “a renewal of strains on financial systems because of heightened funding vulnerabilities and dampened profitability prospects”.
In an implicit reference to Irish banks and other weakened lenders, the review said a small number of institutions “are excessively reliant on central bank liquidity accounting for a substantial share of the overall refinancing volumes”.
Mr Sarkozy’s spokesman said there was no need to discuss “new propositions” and added that the “E-bond” concept promoted this week by euro group chief Jean-Claude Juncker “raises difficulties notably in terms of sharing costs and profits”.
Mr Sarkozy’s support for the chancellor may take the heat from the notion for the time being but EU leaders will face yet more pressure to strengthen their response to the crisis in the build-up to a summit next week.
