–Says Markets Have Not Appreciated Content, Ambition Of Greece Plan
–Admits Could Well Be Fiscal Impact On Growth Short Term
–But Consolidation Will Be Positive For Growth In Medium Term
–Stark: Default Should Not Be Assumption In Stress Tests

LONDON (MNI) – European Central Bank Executive Board Member Juergen
Stark said today that Greece’s fiscal consolidation program remains ‘on
track’ according to the International Monetary Fund.

Speaking at an event organized by the Centre for European Reform
here, Stark said that the financial markets had appreciated neither the
ambition nor the content of Greece’s fiscal adjustment.

The ECB’s chief economist said that the “global crisis is still
going on” and had entered a “new phase” – a global fiscal crisis. If it
was not resolved there was a risk of higher market interest rates

Stark blamed France and Germany for sending out the wrong signal to
the small countries of the Eurozone in 2004-05 with a reform of the
Stability and Growth Pact that went in the “wrong direction”.

Stark said that the fiscal crisis represented a “serious problem”
and fiscal consolidation as well as structural reforms would need to be
“stepped up.”

Stark also attacked recent actions of credit rating agencies,
saying they had been “irresponsible” in downgrading the country before
the elements of the country’s fiscal consolidation plan had even been
agreed between by the Greek government, the IMF and the Commission.

In the current situation, Stark said that Spain risked “punishment”
by the ratings agencies “whatever” it did.

Stark said he favoured “in principle” greater competition in the
field of ratings agencies but noted that “progress” had already been
made in reforming the sector.

What is currently taking place across the Eurozone, Stark said, was
an adjustment of “real exchange rates” as countries brought their wages
and price levels back into some kind of competitive equilibrium.

Stark stressed that he was a “euro realist” – adding: “I know what
needs to be done.” Reform of the Stability and Growth Pact, enhanced
economic governance and crisis management must be agreed by EMU
governments. But the first two are key to resolving the crisis, Stark
said, and if achieved, the third would become “redundant.”

Debt levels should also be made a focus of the Stability Pact,
Stark said, which he said was overly focused on deficits.

The ECB official said it was important not to exaggerate the impact
of fiscal consolidation on growth in the short term, although he
admitted there could well be some negative impact. In the long-term,
fiscal consolidation would be positive for growth, Stark said, and he
urged observers to avoid a “naive Keynesiansism” in their analyses of
the situation.

Stark said that it was important that the forthcoming stress tests
on Eurozone banks be based on “reliable” scenarios and build in any kind
of official bailout for sovereign bonds. The official said that there
should be no assumption in the tests of a sovereign default.

He also said that he and the rest of the ECB Governing Council
supported the creation of the European Financial Stability Fund and its
aims. He said that there would be an “ongoing assessment” of ECB bond
purchasing but noted that markets had “calmed down” since the programme
had begun.

Stark said that ECB bond purchases would not take place on the same
scale as elsewhere, a possible reference to the enormous of official
bond buying which has taken place in the UK and in the US on the part of
the Federal Reserve and the Bank of England.

–London Newsroom, +44-207-862-7492; dthomas@marketnews.com

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