FRANKFURT (MNI) – European Central Bank Governing Council members
seem convinced that Greece will activate the contingency aid plan and
appear to welcome the start of the program – even if they are not all
sold on the idea of IMF participation in it.

The ECB’s chief economist Juergen Stark expressed in no uncertain
terms the lingering hesitation within the Eurotower about an IMF
contribution to Greece aid.

Stark also put monetary policy back on the radar screen for the
first time in months, warning of strong upside inflation risks and
asserting that the ECB “must and will act in a timely manner” on
interest rates.

More on that, but first Greece.

ECB Governing Council members this week expressed optimism that aid
for Greece is finally on its way, dismissing concerns that the E30
billion loan plan could be stopped at the last minute by national
parliaments of individual EMU states.

“The heads of state have been very cautious in fulfilling all the
legal requirements [of releasing funds to Greece], so I’m quite sure
that in this way things will go along as foreseen,” Ewald Nowotny said
Thursday. Similarly, Nout Wellink said that an intervention by Germany’s
constitutional court “is currently the least of my worries.”

Nowotny said that Thursday’s letter from Greece to the European
Commission, the IMF and the ECB requesting talks to settle the details
of support plan was a first step along the path to activating the

“I think this is exactly what has been foreseen,” he said. “There
is a clear structure of the decision-making process, and so this is a
step in this structural decision-making process, and at the end of the
day it leads to the activation of the program.”

He called the letter a “positive development” for Greece that might
finally calm market tensions. “I think what is necessary is really to
activate the measures foreseen, and then I’m sure they will have an
impact on the markets.”

This assessment appears to reflect widely-shared concerns on the
Governing Council.

President Jean-Claude Trichet observed that despite government
assurances and “the determination signalled by the Greek government to
implement the announced adjustment measures for 2010, financial market
tensions are persisting.” In particular, “the liquidity situation of
Greek banks remain difficult and could deteriorate,” Trichet warned.

Lorenzo Bini Smaghi said that Greece has highlighted “the self
reinforcing nature of market trends” and argued that “concrete actions
are needed. This was not fully understood over the last few months.”

But while Trichet assured that “the ECB stands ready permanently to
be in liaison… to participate in the discussions,” his chief economist
took a much sharper tone.

“I am still sceptical concerning [the IMF's] possible financial
contribution,” Stark said. “The IMF has to accept the rules of the
monetary union.”

While the spotlight clearly remains on Greece, Stark’s inflation
and interest rate comments spiced things up on a front that been
virtually dormant for the past several months. Global inflation levels
must be monitored closely, he warned, adding that the ECB “will and must
act in a timely manner” to counter inflationary pressures.

“All in all, risks to the inflation outlook seem to be tilted to
the upside,” Stark said Thursday. Then on Friday, he elaborated that
these pressures could quickly hit the Eurozone.

Strong growth in developing countries could put upward pressure on
commodity prices, leading to higher inflation rates [in Europe] before
the economy has reached a stable path of growth, Stark said. “This could
mean stagflation,” he cautioned.

He warned that, “it is dangerous to hold on to low interest rates
for too long.”

While the 1.4% y/y HICP inflation figure for March released today
may indeed appear alarming, the lack of general price pressures and
decreasing upward base effects from energy prices in the months ahead
suggest inflation will remain well below the ECB’s price stability
target for some month to come.

Despite his warning about the risks, Stark did confirm on Thursday
that the ECB expects “inflation in the euro area to remain moderate over
the policy relevant horizon,” pointing to unchanged official interest
rates for some time to come. Nevertheless, his comments suggest that
inflation concerns are reemerging at least among the Council’s hawks.

On non-conventional support measures, the central bank confirmed in
its Monthly Bulletin Thursday that “given the continued uncertainty
surrounding future developments in the euro area economy, gradualism
remains an essential element of the phasing-out of the ECB’s
non-standard operational measures.”

Nout Wellink, however, warned that in order to avoid the
potentially destabilizing impact from these measures, extra liquidity
must be withdrawn and public finances consolidated “relatively early.”

Asked about persisting market speculation that the Governing
Council might consider extending its E60 billion covered bond purchase
program, Wellink said: “We do not plan to exit early because the market
has calmed. We will decide and communicate in due course how to proceed
after that.”

–Frankfurt newsroom +49 69 72 01 42; Email:

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