MILAN, Italy (MNI) – The Greek debt crisis has not only highlighted
the difficulty democracies face in dealing rapidly with structural
problems, but also the perverse influence some players can have on
market behavior and public opinion, European Central Bank Executive
Board member Lorenzo Bini Smaghi said Thursday.

“The financial markets are the ‘brains’ of the economy,” Bini
Smaghi said in the text of a speech for delivery here. “It cannot do
without them, but if the brains do not work well, the rest of the body
is at risk.”

The often critical reaction of market analysts and players to the
rescue plan for Greece may have been based on the financial stakes they
had in a failure of the plan, he ventured.

“The recent downward revisions of sovereign credit ratings raise
many doubts,” he said. “Some of these revisions were not based on
macroeconomic data or new budgets, but on the assessments given by the
market for sovereign bonds and the possibility of contagion. In this way
the agencies have not given an independent assessment, but one linked to
markets’ reaction.”

“One might even ask if they have in some cases an interest in
pushing the market in the same direction that it has already moved in,
contributing to the pro-cyclicality and the phenomena of distorting
prices,” he ventured.

In such circumstances, “it would have been a mistake for the ECB to
continue to depend on the judgments of rating agencies,” he explained.
“Having helped to draft the programme, the ECB — along with the IMF and
the European Commission — is better able to assess the risk posed by
Greece than the rating agencies.”

Criticism that followed the ECB’s decision to drop rating
requirements on Greek sovereign debt used as collateral may also have
resulted from analysts’ own interests, Bini Smaghi suggested.

“Reading carefully what these analysts had written before the ECB’s
decision, one notes that many had considered the support programme for
Greece as inappropriate, and saw a restructuring as inevitable. In other
words, they had recommended selling Greek securities and the ECB’s
decision to maintain the eligibility of such securities went clearly
against their interests. So it’s no surprise that their response was
negative.”

Bini Smaghi suggested that markets may be mistaken in believing
that in countries where “there is a perfect overlap between the monetary
and fiscal authorities the risk of insolvency” is smaller than in the
Eurozone, “which cannot monetize its debt.”

Nevertheless, given the market pressure, the Eurozone “has to
tackle the problem immediately and ensure that each country is solvent
without a monetary contribution,” Bini Smaghi said.

Thus, “if the euro area is able to overcome the current
difficulties and restore its public finances in time, it will exit from
this ‘public’ phase of the crisis before others,” he said.

“By intervening to support the economy and financial system, the
economic policy authorities have avoided a depression, but they have
postponed the problem, which is beginning to become weighty,” he said.

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