FRANKFURT (MNI) – The European Central Bank must ensure that its
program of buying government bonds does not become a quasi fiscal
policy, European Central Bank Executive Board member Juergen Stark said
Wednesday.

The central bank is currently in the process of “slowly”
withdrawing its supportive measures and is constantly checking to see if
conditions are still appropriate for a continuation of such policy,
Stark told German daily Die Welt.

“The situation on financial markets has calmed,” he said.

Nevertheless, “uncertainty still rules,” Stark observed. “We must
avoid intervening in functioning markets with our measures,” he added,
warning that otherwise the bond buying program could become a “quasi
fiscal policy.”

“Therefore, we must constantly examine how appropriate and
necessary [the bond purchasing] still is,” he said. “And that is
happening. Last week, we did not buy up any new bonds,” he noted.

Asked whether the central bank can really withdraw liquidity when a
few Eurozone states are still under duress, Stark responded that the
central bank “does not subsidize certain governments with our measures.”
Rather “the point is to guarantee the functioning of certain segments of
financial markets.”

Thus, “our program is a monetary policy decision that can be called
back at any time,” he said.

To reduce their vulnerability, Eurozone countries “should not rely
on supportive measures from the ECB,” but “rather credibly consolidate
their budgets,” Stark said.

While the situation in money markets has “clearly eased” versus
where it was one year ago, the ECB is still providing support to markets
that are not functioning sufficiently, Stark said. But, “there is no
special treatment for individual banks,” he insisted.

The central bank has a clear mandate: price stability, Stark
underscored, and worries about the bank’s ability to guarantee that are
not justified, he added.

“We see at present neither the risk of inflation nor deflation. We
also know, however, that too lax a monetary policy can lead to negative
by-products,” he said, reiterating remarks made at a speech in Stuttgart
last week.

“Therefore we are observing very precisely whether there are
distortions on markets,” he said. Low interest rates reduce the
incentive to consolidate public finances, he pointed out. “We have our
eye on all of that. That’s true also for the international arena,” he
said.

Stark said he “sees the potential danger of a devaluation race, but
I see no concrete evidence that it is coming to that.”

Addressing Eurozone peripheral countries, Stark said he was
“irritated” by the idea broached recently by the IMF that the deadline
for Greece to repay its E110 billion loan to EMU and the IMF be
extended.

“We have complete confidence in Greece,” Stark underscored, noting
that the country’s austerity program has been in place for half a year
and on the right path. “An additional discussion is thus superfluous.”

“That is also true by the way for the proposal of the IMF to extend
the payment deadline,” Stark elaborated, adding that his annoyance
stemmed from the Fund’s agreeing to the terms of the Greek recovery
program six months ago.

While some observers see Ireland developing as the next Greece —
indeed a newspaper report Tuesday said the country could needing an
additional E5 billion in budget savings next year — Stark said “the
situation in Ireland is not at all to be compared with that in Greece.”
He added that the situation in Ireland has stabilized and that this is
visible in financial markets.

“Also the Irish government has recognized that it needs to act to
cut its public deficit to below 3% [of GDP] by 2014,” Stark noted.

Stark dodged a question about whether he would take over as
president of the Bundesbank if current head Axel Weber became ECB
President next autumn, following the departure of current ECB president
Jean-Claude Trichet.

“I have nothing more to prove to myself or others,” he said.

–Frankfurt bureau; +49-69-720142, tbuell@marketnews.com

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