–Liikanen Warns Of Recession If Confidence Doesn’t Return Soon

FRANKFURT (MNI) – ECB Governing Council Member Jens Weidmann Monday
appeared to harden his stance on the prospect of a Greek default by
suggesting that, even if unpalatable, the consequences might have to be
accepted.

His comments came a day after Greece’s Finance Minister Evangelos
Venizelos dismissed talk that Greece was heading for default, calling it
not only “irresponsible but ridiculous.”

As Venizelos held extended talks with troika members, Weidmann
reaffirmed his stance that Greece should not receive any more support if
it failed to meet its obligations — even if the consequences resulted
in a “relatively uncomfortable scenario.”

His comments echoed those of German Finance Minister Wolfgang
Schaeuble, who said on Sunday that Greece had to decide about its future
in the Eurozone and must be under no illusion about its obligations.

However, in additional comments made in an interview with Der
Spiegel Magazine published on Monday, Weidmann cautioned: “It isn’t
helpful to speculate openly about what scenarios would ensue if the
Greek government decides” that it is unable or unwilling to fulfill its
commitments.

Weidmann also fired another shot across the bow of national
politicians in the Eurozone, saying they must ultimately choose between
maintaining their full fiscal sovereignty and pooling their liabilities,
because both are not possible.

“All I’m saying is that [European] lawmakers must decide between
two models: a model with autonomous members, who are not liable for
others and are disciplined by the market, and a model with deeper
political integration,” he told Der Spiegel.

There is no stable middle ground, he added. “I think it’s a
dangerous approach to bring about a communization of liabilities among
independent national fiscal policymakers in the hope of achieving
stronger political integration, without real intervention rights and
sanctions.”

Weidmann also repeated his criticism of the ECB’s secondary market
bond purchases in an appearance Monday before a Bundestag budget
committee. He argued that EU-IMF bailout loans to highly indebted
Eurozone states were a more efficient instruments than bond purchases
either by the ECB or the European Financial Stability Facility (EFSF).

“I would advise to focus on other instruments…There are more
efficient measures than bond buys in secondary markets,” Weidmann
argued. “Bond purchases by central banks have to be seen especially
critically because they blur the border between monetary and fiscal
policy.”

Weidmann’s comments preceded news on Monday that the ECB had bought
and settled just under E9.8 billion worth of sovereign bonds last week,
down from about E14 billion in the previous week but still a significant
intervention by previous ECB standards.

Yields on Spanish and Italian bonds have remain at elevated levels
even though volatility in bond markets has diminished as a consequence
of ECB bond purchases.

Meanwhile, in rather gloomy and uncharacteristically dramatic
comments, ECB Governing Council Member Erkki Liikanen warned that unless
financial and economic confidence can be quickly restored, “there is a
danger that the economy will slip into another recession.”

Liikanen seemed go further even than the ECB’s recently modified
assessment of the economic outlook, by describing the downward risks to
growth as “substantial” and daring to utter the “R” word.

Liikanen also warned that the Eurozone debt crisis is no longer
restricted to a group of small countries, but has taken on “systemic
dimensions.”

In an interview with Spanish newspaper Expansion published Tuesday,
ECB President Jean-Claude Trichet left the door open to a possible rate
cut, repeating his comment that the recent shift in the ECB’s economic
outlook was “significant.”

However, Trichet reaffirmed the bank’s resolve to continue
“maintaining inflation expectations firmly anchored,” the paper
reported.

His comments come in the wake of S&P’s decision to cut its credit
rating on Italy late Monday evening.

–Frankfurt newsroom +49 69 72 01 42; e-mail: nmackie@marketnews.com

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