PARIS (MNI) – The European Central Bank will continue to aid Greece
by providing liquidity to its banks but cannot finance the government
directly, Executive Board member Jose Manuel Gonzalez-Paramo said in an
interview published Thursday.

Nor should the central bank aim to impose a ceiling on yields for
shaky Eurozone sovereign debt or buy unlimited volumes of government
bonds in the secondary market, Paramo argued.

“A default by Greece is not necessary, not desirable and unlikely,”
he told the French business daily Les Echos. “I am confident that the
negotiations [with private sector creditors] will produce results very
soon, which will allow the country’s debt to be reduced to 120% of GDP
in 2020, provided the country applies the reforms it has promised.”

Concerning a possible haircut on Greek debt held by public
authorities, including the ECB, Paramo said he had “nothing to say on
the matter. Simply that financing the Greek government by the ECB is
excluded.”

Asked whether the unlimited three-year ECB loans to banks would
encourage them to buy sovereign bonds, the central banker said, “it’s
possible. We don’t know who the final buyer really is. What we do know
is that the fear that banks would not be able to access financing has
disappeared.”

Paramo noted the “fairly moderate” reaction of the markets to the
recent downgrade of many Eurozone countries by Standard & Poor’s — no
doubt because the move was expected and “perhaps also because the blind
confidence of investors in the ratings has begun to wane.”

The ECB “remains ready — as it was before S&P’s announcements —
to do what is necessary according to its mandate to counter any
deterioration of the economic and financial situation in the Eurozone,”
he said. “However, as I just said, we have seen no important negative
reaction of the markets to S&P’s announcements.”

Asked about expanding the central bank’s bond-buying program to
allow unlimited purchases, Paramo argued that modifying the strategy
“would not improve the confidence of markets.”

Nor would it help to cap the borrowing rates of sovereigns in
difficulty, he said. “It would do nothing to resolve the crisis of
confidence for certain sovereign paper if there were a firewall which
dispensed governments from taking the actions needed.”

“The construction of the European Union does not allow this and I
think that, in the end, the best thing countries can do is to attack the
roots of their problems,” he added.

–Paris newsroom, +331 4271 5540; email: ssandelius@marketnews.com

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