HELSINKI (MNI) – There is a significant danger that Europe’s
sovereign debt problems might no longer be containable and could spread
throughout the global financial system, European Central Bank Governing
Council member Erkki Liikanen said in an interview published Thursday.
“Now there is a big risk that the European debt crisis cannot be
contained and that the crisis will infect and spread worldwide,” he told
Finland’s weekly magazine Suomen Kuvalehti.
Liikanen, who heads the Bank of Finland, also said that a European
banking crisis is now more likely than before. If it happens, he added,
“it is not possible for [Finland] to avoid it.”
He warned, as he had earlier this week, that the global economy
could relapse into another recession if political leaders fail to
restore market confidence in their ability to make the right decisions.
He raised the specter of another Lehman Brothers, reminding how it
infected global financial markets three years ago.
“Now, concrete actions are necessary,” Liikanen urged, adding that
it is “especially important” for Eurozone governments to implement the
decisions that EMU leaders made at their summit on July 21, including
new authority for the European Financial Stability Facility (EFSF) to
buy bonds in the secondary market and recapitalize banks.
Liikanen defended the ECB’s own bond buying program, which has been
under attack in some quarters, including by some of Liikanen’s
colleagues on the Governing Council such as Bundesbank President Jens
Weidmann, who has argued that the purchases amount to a monetization of
sovereign debt – a big taboo in European central banking circles.
“These purchases are unquestionably legitimate as they are carried
out in the aftermarket at market prices,” Liikanen countered. If the ECB
were to buy bonds directly from the issuer, then it “would be against
the regulations set to prevent central bank financing” state deficits,
he said.
He noted that the ECB’s balance sheet has expanded relatively
little compared to the U.S. Federal Reserve and the Bank of England,
both of which have engaged in full-blown quantitative easing.
“Still, it is true that the bond purchase program based on monetary
criteria is new and unusual,” Liikanen said, adding that it is a
temporary and exceptional policy.
In what seemed an implied criticism of Weidmann, and of Weidmann’s
predecessor Axel Weber, who had also criticized the bond buying program
and eventually resigned over it, Liikanen declared: “I am a team player
and when the decisions have been made, I defend them.”
[TOPICS: M$$EC$,M$X$$$,M$$CR$,MGX$$$,MT$$$$]
