FRANKFURT (MNI) – European Central Bank policy-makers reject an
imminent introduction of eurobonds to help bring down borrowing cost for
struggling Eurozone member states and pledged further bond market
interventions to help ease market tensions.

“Eurobonds are not only the entrance into a transfer union, they
are a transfer union,” Executive Board member Juergen said in a
Handelsblatt interview Friday. They are not the magical solution to the
sovereign debt crisis, but rather just mask the symptoms, he said. “It
is a false solution that creates false incentives.”

Governing Council member Ewald Nowotny was not as absolute in a
Wirtschaftsblatt interview Wednesday, recognising that it is “a
discussion worth having” but only on a technical basis. “I do not think
the time is ripe for a decision on this question,” he said.

But as financial stocks remain in free fall, the debate about
eurobonds as well as an increase in EFSF funds that German and French
leaders had excluded earlier this week continues to rage.

“In my view, it’s possible to do more” with the bailout fund, it’s
also possible to have real eurobonds,” Belgian Finance Minister Didier
Reynders told the Financial Times on Friday. “If you want to end
speculation in the markets, you need to prove you have deep enough
pockets.”

The more acute the crisis, the louder the call for eurobonds is
likely to get. New hurdles for the second Greek bailout just add oil to
the fire.

Two of the Eurozone’s triple-A rated countries — Austria and the
Netherlands — as well as Slovakia and Slovenia, said this week that
they would also insist on receiving collateral against their backing of
Greek bailout loans should Finland secure a deal.

Greece and Finland had reached a preliminary agreement that would
see Greece offering Finland a cash deposit to back loans made under the
July 21 bailout deal. The deposit would be roughly equal to Finland’s
share of loan guarantees in the new bailout.

Unless member states can find a compromise solution, the Greek
bailout could be drained of significant share of money, raising fresh
questions over rescue efforts that are likely to add to market jitters.

Stark said that the ECB would continue to intervene in bond markets
if these jitters continue. “The speed and volume of purchases will
depend on the ECB’s assessment of market conditions…The decisive
factor is how long market tensions persist.”

The central bankers were less committal over additional
liquidity-providing measures to help counter the recent rise in
interbank market tensions. These tensions have been reflected in a rise
in cash parked with the ECB overnight and the first tap in the ECB’s
dollar operations in 23 weeks on Wednesday.

Nowotny observed that a number of measures have been taken that
should inject fresh confidence. Stark said that the ECB’s offer of
six-month loans earlier this month, in which the bank injected E50
billion, “from today’s perspective is a one-off.”

The two policy-makers also made comments on monetary policy which
may be seen as somewhat contradictory.

Nowotny, generally considered to be dovish, said that he is
currently not concerned about inflation. His personal concerns go in a
“different direction, a Japanese one,” as the Eurozone may face a
“prolonged period of low growth rates and low inflation rates.”

The superhawk Stark, on the other hand, reiterated previous
warnings that keeping interest rates too low for too long carries risks.
Such a policy “contributes to excessive risk-taking and wrong
investments and therefore harms an economy’s growth potential,” he said.

Both statements were made in a rather general context and may thus
offer little guidance on the near-term monetary policy path. Still,
Stark’s renewed warning suggests that even if slowing growth may steady
the ECB’s hand for now, market bets on interest rate cuts may be
premature.

–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com

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