–Says EFSF Should Be Allowed To Buy Debt

PARIS (MNI) – In what has become a traditional post-meeting
excercise for senior officials of the European Central Bank, Executive
Board member Jose Manuel Gonzalez-Paramo appeared in a Spanish newspaper
interview over the weekend to echo the message delivered last Thursday
by ECB President Jean-Claude Trichet.

Gonzalez-Paramo was asked by El Mundo whether Trichet had sent a
clear signal that the central bank would raise interest rates in April.
“The message is that it is possible and that the ECB sees the need to
maintain strong vigilance,” the Spanish board member replied. “And the
message should be read as a signal of confidence; the ECB is not
forgetting its mission to control inflation. This is not about
responding to petroleum prices, but rather preventing second-round
effects.”

Gonzalez-Paramo also made clear that the decision to raise rates,
if taken, would be in response to the aggregate Eurozone situation,
without favor to particular countries who might be more vulnerable to
the impact of a rate hike.

“It should be very clear that the ECB is not thinking about one
specific country when it makes these decisions, but rather the ensemble
of the Eurozone,” he said. “Otherwise, if we were waiting on the country
that is recovering the most slowly, we would not we able to assure price
stability in the medium term, which is our mandate.”

He weighed in on the debate over a “grand bargain” among Eurozone
political leaders to end the sovereign debt crisis, arguing — in
contrast to the German government — that Europe’s bailout fund, the
European Financial Stability Facility, should be allowed to buy
sovereign debt.

“The important thing is its capacity of dissuasion in the markets,
to guarantee the stability of the system,” Gonzalez-Paramo told the
newspaper. “And to be dissuasive, it should have sufficient volume, be
flexible and effective, and for that it needs the capabilities for
action, among which should be buying debt, there is no doubt.”

The ECB has been pushing for months for the EFSF to be given
authority to buy bonds, a function that is currently performed by the
ECB — to the growing distaste and impatience of its Governing Council.
Gonzalez-Paramo defended the ECB’s bond-buying program, saying that
while it is not for the long term, it was needed to confront “episodes
of grave financial instability, with markets dislocated and risk pricing
in the market that did not correspond to fundamentals.”

And he noted that at E77.5 billion, the ECB’s bond-buying program
is “very small” compared to those of the United States and UK.

He also asserted that it “is not sustainable for banks to have to
go to the ECB to obtain liquidity,” echoing the arguments of many of his
colleagues, who have said for months that the central bank is working on
a plan to wean the so-called addicted banks off of central bank cash —
a plan that has not yet been made public.

Gonzalez-Paramo downplayed the importance of negotiating lower
interest rates on aid loans to Greece, Ireland and any other country
that might seek bailouts in the future. To make interest rates the
central argument “is to render a disservice to those countries,” he
said.

He noted that in the past there had been cases of interest rate
modifications on loans from the International Monetary Fund. However,
they were “always conditioned on strict compliance with the [agreed
adjustment] program and never outside of market conditions,” he said.
And that should be even truer in Europe, “where the Treaty does not
allow us to subsidize these interest rates,” he argued.

He endorsed the argument that in addition to the governance of the
monetary and economic aspects of the single currency union, officials
should add a third leg — competitiveness. It should monitored, just as
fiscal policy is, and there should be a certain “automaticity” to
sanctions for those who break the rules, he argued.

In each country, the focus should be on those factors that most
affect competitiveness, Gonzalez-Paramo said. In Spain, that would be
“the problem of wage indexation,” which has brought pay increases larger
than the Eurozone average. In January, for example, wages rose an
average of nearly 3% — well above the ECB’s price stability limit. That
is because of both Spain’s indexing and collective bargaining, both of
which produce pay hikes tied to inflation — which is higher in Spain
than in EMU as a whole.

“One might agree with it or not, but what we saw happen in January
with wages in a country that has an unemployment rate of more than 20%
is so absurd from an economic point of view that it should make people
think, regardless of where they stand on the political spectrum or in
labor relations,” he said.

Gonzalez-Paramo had encouraging words for Spanish authorities with
regard to the reform of the country’s troubled savings banks. The
measures taken, he said, were “very positive. They “clarify to the
institutions the need to capitalize themselves in the market” and that
“temporary public participation,” with a penalty, remains the “last
option.”

He declined to say whether the way Spain has handled its weak banks
should be seen as an example for other countries in Europe. “I prefer
not to compare,” he said. “Since May the ensemble of Spanish reforms has
been very positive, and the market is understanding it that way.”

Gonzalez-Paramo appeared to dodge a question on whether Bank of
Spain Governor Miguel Angel Fernandez Ordonez, widely credited with the
strong banking reform effort, might be considered a candidate for the
ECB’s board.

“He’s already at the ECB; he’s an active, enthusiastic and
important member of the Council,” Gonzalez-Paramo said. But he suggested
that Ordonez alone did not deserve all the credit for Spain’s bank
reform measures. “Let’s not forget it’s a decree of the government,” he
said. “I wouldn’t hand out individual medals, but rather team ones.”

–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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