WASHINGTON (MNI) – Rapidly rising risks of contagion are
threatening financial stability and growth prospects in the Eurozone,
European Central Bank President Jean-Claude Trichet said Friday.

To keep the crisis in check, all authorities must take decisive and
swift action, Trichet said.

“Risks to the stability of the EU financial system have increased
considerably,” he noted. “Tensions have spread to capital markets around
the world,” Trichet said, pointing to high equity market volatility.

“The high interconnectedness in the EU financial system has led to
a rapidly rising risk of significant contagion. This is threatening
financial stability in the EU as a whole and adversely impacts the real
economy in Europe and beyond,” he warned.

“Looking ahead, decisive and swift action is required from all
authorities,” Trichet said. “Authorities must act in unison with total
commitment to safeguard financial stability.”

This includes “implementing fully and rapidly the measures agreed
upon July 21″, adopting sustainable fiscal polices and structural
reforms and pursuing coordinated efforts to strengthen bank capital.

For its part, the ECB stands “ready to supply liquidity on an
unlimited basis at a fixed rate, as long as you have eligible
collateral,” he said. The ECB is currently “supplying liquidity of E550
billion,” he observed.

The ECB has “between E4 and E5 trillion of eligible collateral
which could be mobilized if necessary,” he said.

Turning to the fiscal troubles of the Eurozone, Trichet said that
“we are not hiding what we see as the present situation.” Nevertheless,
he stressed that the situation in Europe as a whole is more sustainable
than that of other advanced economies.

At the end of 2011, he said, it is “very likely that we will find
that the overall” public deficit of the euro area “is of the order of
magnitude of 4.5% of the GDP,” which — like the current account
imbalance — compares very favorably to other advanced economies.

Therefore, according to Trichet, “the overall picture when we look
at Europe as a whole and the euro area as a whole is very different from
the perception.”

“Some countries in this grouping of countries” behaved incorrectly,
he said, “and are now correcting their trajectory.”

The lesson drawn from the crisis has been so convincing, he said,
that he is confident “that not only the letter but also the spirit of
this new governance will be applied.”

In the long run, Trichet said that more centralized power will be
required that would allow the center to enforce policies on member
states should they violate the currency union’s rules.

–Frankfurt newsroom +49 69 72 01 42; e-mail: frankfurt@marketnews.com

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