PARIS (MNI) – Recent market tensions show that the crisis is still
not over, and non-conventional central bank actions of the type recently
reinforced by the European Central Bank are “more than necessary,” ECB
Governing Council member Christian Noyer said Thursday.

Speaking at a conference sponsored by the Bank of France, which he
heads, Noyer noted the recent ECB moves taken to counter a renewal of
market stress — including reactivation of supplementary liquidity
operations and it decision to buy government bonds.

“Recent renewed strains on financial markets, especially sovereign
markets, and the subsequent impact on the banking sector show us that
the crisis is not fully behind us and those central bank actions are
more than necessary to accompany the redefinition of the banking sector,
the well-functioning of markets and the return to a self-sustainable
recovery,” Noyer said.

He noted, as have virtually all of his ECB Council colleagues, that
the central bank’s bond purchases, which started May 9, have been
sterilized, “thus fully neutralizing the effects in the banking system.”
He said the decision to purchase bonds, which he characterized
“historical and exceptional,” stemmed from the spillover of market
volatility, liquidity risks and market disorder.

While Eurosystem measures to stabilize the system have “lowered
tail and contagion risks,” the roots of the problem must be addressed in
order to enjoy financial stability over the longer term, he said. While
the measures have removed near-term uncertainty, “they could prove
insufficient to provide a lasting change in the negative sentiment of
investors in the medium term if budget deficits and the debt situation
are not considerably improved,” Noyer said.

In order to ensure sustainable public fiscal positions and provide
conditions conducive to durable economic growth, governments must
accelerate their budget consolidation efforts, he said.

At the same time, he acknowledged that the inevitable drop in
public spending and investment as a result of such efforts “could weigh
on recovery even if the calibration and the path of fiscal adjustment
are supposed to be fine tuned to allow sustainable fiscal consolidation
without challenging a long-lasting economic recovery.”

In what appeared to be a tacit acknowledgment of recent divisions
among Eurozone leaders, Noyer urged European officials to “show their
strong level of cooperation and commitments to global and common
solutions. Any unilateral and uncoordinated decision may notably prove
to be less efficient and may amplify markets’ volatility.”

Noyer noted that European banks have “recovered partly” thanks to
central bank and government support. He urged them to use the return to
profitability to bolster their capital positions.

At the same time, Noyer warned that the banking system is far from
out of the woods. He warned that the sharp run up in sovereign bond
yields damages banks both because it raises their cost of funding and
because it damages the portfolios of those institutions holding those
securities as assets.

“A surge in the cost of funding will be…damaging for banks’
profitability and their ability to grant credits,” Noyer warned. At the
same time, erosion in the asset value of sovereign debt securities could
erode the capital base of banks, also “reducing the potential for
lending to the economy,” he said.

–Paris newsroom, +331-42-71-55-40;

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