FRANKFURT (MNI) – The European Central Bank sees medium-term
inflation risks up and is accordingly vigilant, ECB Governing Council
member Jens Weidmann said in an interview published Sunday.
The head of the Bundesbank told German daily Die Welt that
inflation is not the ultimate price of the financial crisis; rather, it
is costlier energy that is the reason for rising prices, he said.
The true danger would be a wage-price spiral in response to higher
headline inflation, “but at the moment there are no concrete indications
of this,” he said.
“However, monetary policy in the Eurozone is rather loose, and that
is despite overall solid economic growth,” he continued. “Against this
backdrop, in the ECB Governing Council we see higher price risks over
the medium term that is relevant for us. We are correspondingly
vigilant.”
Weidmann rejected the idea that monetary policy should be held
hostage to the sovereign crisis.
With regard to the debt crisis in Greece, he said there was
“absolutely nothing wrong” in principle with making private creditors
share in the cost.
“On the contrary, it would be sensible, because in that way the
creditors are made to take responsibility for their investment
decisions, and it reduces the burden on the taxpayers,” he said.
As one country cannot be made responsible for another’s debts, “it
therefore cannot be excluded that a state becomes insolvent or that
private creditors assume the burden.”
The problem is in the implementation, Weidmann said, arguing that
“a forced extension of maturities harbors more risks than opportunities
in this specific situation.”
The budgetary position of Greece and the sustainability of its
public finances would be only “minimally” improved as a result of such a
restructuring, while the resulting credit event could lead investors to
lose confidence in other Eurozone states, he argued.
Weidmann said that what rankled him most, however, was that the
central bank could be expected to shoulder the costs of such a scenario.
“Yes, we reject an involvement of the central banks in the burdens
and risks,” he said. “A presumably relatively small contribution by the
private sector would be purchased at the cost of a danger of contagion
and a higher assumption of risk by the central banks. We oppose this.”
Under such a scenario, he said, central banks would effectively be
used to distribute the financial burdens among member states without the
involvement of national parliaments, and fundamental principles of
monetary policy would be violated.
“For example, our refinancing operations, with which we put central
bank funds at the disposition of banks, are supposed to be risk-free,”
he said. “Should there be a credit event or the bonds receive a default
status, the central banks cannot simply continue to accept these bonds
as security. Because that would not be in line with our mandate.
Monetary policy has a clear mission: monetary stability.”
A “considerable” share of Greek bonds are held by Greek banks, he
said, and were the maturities to be lengthened, that would worsen the
situation of those banks.
“And here as well we reject the idea that monetary policy should
take over the necessary additional financing and the risks associated
with it,” he asserted.
Though unwilling to comment on the decision of the ECB to buy
government bonds in May 2010 — before he had joined the Council —
Weidmann said it was “right” that the Eurosystem had not been purchasing
bonds of the crisis-hit countries for more than two months now.
Asked whether a formal termination of the program would make for a
clearer signal, he replied, “It is decisive in my opinion that it is
inactive. We are no longer buying government bonds.”
The ECB cannot and will not become a depository for bad bonds, he
asserted. “That is why I advocate strongly that existing risks not be
expanded, but rather diminished.”
The solvency of Greece hinges on the attitude of the Greek
government and people, Weidmann said. If Greece does not fulfill the
obligations it assumed, it will necessarily have to forego further aid
and “would have to bear the certainly dramatic economic consequences of
a default,” he made clear.
This would not be sensible for Greece and would also be difficult
for other countries, “but the euro will remain stable in this case as
well,” he promised.
A “purely voluntary solution” would be very welcome, Weidmann said,
though he conceded that there are no longer many Greek bonds held by
private investors outside of Greece and that for this reason among
others “we should not set our expectations too high.”
Greece can deal with its debt problem if it implements the
austerity and reform program as agreed, he argued.
In other comments, Weidmann said it is understandable that the
string of bad news from some countries undermines citizens’ trust in the
common currency, “but the success of the euro is not endangered. With
the most recent monetary policy decisions, the ECB Governing Council
underscored that despite the problematic situation in individual member
countries, it is continuing our policy which is clearly oriented towards
monetary stability.”
He also said that the German deficit could drop under 2% of GDP
this year, but fiscal consolidation should continue to take priority
over tax cuts.
–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com
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