FRANKFURT (MNI) – The European Central Bank does not intend to
finance governments, Executive Board member Lorenzo Bini Smaghi assured
in an interview published Wednesday.

The Eurozone has entered a new phase of the economic crisis, a fact
that the ECB must consider when pondering its exit strategy, Bini Smaghi
told Germany’s Boersen-Zeitung.

The ECB’s recent move to purchase government bonds does not affect
the distinction between monetary and fiscal policy, the central banker
argued, reiterating that as long as the bank maintains control over the
monetary base, worries about inflation are unfounded.

“The euro is a global currency, which means that we have to devise
measures that the responsibility of a global currency demands,” he
explained.

Bini Smaghi rejected arguments that the ECB’s recent decision
represented the end of its independence, asserting that the central bank
has proven throughout its lifetime that it does not yield to political
pressure.

The ECB is exercising neither quantitative easing nor “government
debt easing,” he insisted.

“We do not intend to finance the governments,” he said. “We want to
improve the functionality of the markets, and the government bond market
is one of the most important segments.”

“Just before last weekend, we observed that the market for some
government bonds was becoming severely impaired, such that the
transmission mechanism of monetary policy was no longer able to
function,” he explained.

Thus, the bank “had to react to this and, therefore, we brought
back out some of the unconventional instruments that we had already
withdrawn.”

Asked what might happen if governments failed to reform their
fiscal policies, Bini Smaghi responded that “it is not the task of the
ECB to save the entire system…Looking around, governments have finally
woken up, and this might be a positive element in this crisis, which is
a general one, affecting all advanced economies.”

Pressed as to whether the Eurozone could be held liable for the lax
fiscal policies of individual member states, he said that “in order to
eliminate the risk of contagion, countries must put their public
finances in order. And put pressure on those who are more lax.”

“What lacked in the past was sufficiently strong peer pressure on
the lax countries,” he said.

The process of purchasing government bonds “is coordinated
centrally at the ECB, both in terms of strategy and tactics,” but “the
national central banks implement the purchases operationally,” he
explained.

Although buying securities is “of course risky,” up to now “we are
likely to have achieved surpluses with the purchases, as prices have
recovered,” he informed.

“We are currently in a new phase of the crisis, we have to take
that into account in our exit strategy,” he explained.

“The crisis of government debt has now begun to have an impact on
the functionality of the financial markets,” he observed.

Refuting those who say otherwise, Bini Smaghi insisted that “the
border between fiscal and monetary policy is unaffected by our [bond
buying] program.”

“As long as we have control over the monetary base, there is no
danger vis–vis the price level, and we still have control over it, as
always,” he said.

Pressed if he could at least understand the concerns of those who
feel that the bank’s independence has been jeopardized, Bini Smaghi said
emphatically, “No, I do not understand these concerns.”

The bank has proven over the last 12 years that it does not give in
to political pressure, he argued. “Nothing has changed in that respect.
We took this decision ourselves in line with our responsibilities. There
was no external influence whatsoever.”

Though the current crisis is “unprecedented,” the bank has shown in
the past that it can react to exceptional circumstances, adopt
non-conventional tools and still delivery price stability, he explained.

“Inflation expectations remain well anchored, which proves that we
are credible in acting as we did. And we stand ready to do what is
necessary to maintain this credibility,” he emphasized.

“In principle, a central bank going bust is barely conceivable,” he
assured, “as long as seigniorage can be achieved by issuing banknotes.”

Moreover, “we have huge currency reserves in the Euro system,” he
reminded.

–Frankfurt bureau tel.: +49 69 720 142. Email: frankfurt@marketnews.com

[TOPICS: MGX$$$,MT$$$$,M$$CR$,M$X$$$,M$$EC$]