HELSINKI (MNI) – If European officials fail to tackle the debt
crisis in a convincing way, the economic outlook could darken
substantially compared to current expectations, European Central Bank
Governing Council member Erkki Liikanen said in an interview over the
weekend with Finland’s YLE television station.
The Bank of Finland, which Liikanen heads, published new forecasts
last Thursday, “based on the assumption that the euro area debt crisis
will not get any worse,” he noted. The bank also presented an
alternative, bleaker set of forecasts in the event things do
deteriorate.
“For now, the basic forecast we have presented is valid. But if
uncertainty increases for another few months, we will move towards the
alternative forecast [of a more substantial economic downturn],”
Liikanen said.
“Everyone can follow the developments. If we are able to contain
problems in Italy and Spain, if decisions on the EU level on the
European Stability Mechanism and support through the IMF are agreed
upon, if general confidence is improved, then [the Eurozone crisis] can
be stopped,” he said. However, “if this is not achieved, it is easy to
see us moving towards the worse alternative.”
Liikanen, like many of his ECB colleagues, said it is up to
national governments, not the central bank, to fix their problems.
“The main responsibility of the central bank is to ensure the
functioning of the banking system,” he said. “We ensure price stability
and secure the liquidity of the banking system. Every country must then
attend to their public [finances]. In some, limited instances, the
central bank can also operate in the secondary market, but the central
bank can not directly finance governments.”
As he had last week, the Finnish central bank chief noted the
difficulties facing banks, which are tightening lending in response to
interbank tensions, the need to raise capital ratios and increasing
concerns about the sovereign bonds on their balance sheets.
“Banks are in a challenging situation, and the functioning of the
financial system must be preserved,” Liikanen said. “Banks need better
capital and more of it, and their financing must be secured.”
He noted the ECB’s decision last week to provide loans of up to
three years to banks. “This is one of the ways we try to help banks with
their liquidity challenges, and we hope that this will support bank
lending to companies and households,” he said.
Asked about Friday’s downgrade of Belgium by Moody’s, Liikanen
noted the foibles of rating agencies both before the crisis, when they
“perhaps” underestimated risk, and now, when they “may be”
over-estimating it.
“However, the main message is that one should take care of one’s
economy in such a way that the country is not at the mercy of the
markets,” he said. He noted that Belgium didn’t even have a government
for 1.5 years. “Now that the mistrust from the markets has increased,
they have established a government and started to agree on budgetary
balance and tried to control the situation,” he added. However, “It
would always be better to act in advance, so that one would not have to
react to surprises from the markets.”
Liikanen said he thought countries outside of Europe, such as
Brazil and China, would want to participate in a general funding
increase for the International Monetary Fund, which is being touted by
European leaders as one of the pillars of a solution to the Eurozone
crisis. The idea is that the IMF would use some of the money to help
support vulnerable Eurozone countries.
“I believe that many other countries will want to participate
through the IMF, but we must of course wait for their decisions,”
Liikanen said. He argued that, “the nature of the crisis is, after all,
global. If one economic zone experiences challenges, the cycle of
distrust worsens and no one is excluded from it.”
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