BERLIN (MNI) – Ireland’s debt problems are not a threat to the
euro, European Central Bank Executive Board member Lorenzo Bini Smaghi
said in a newspaper interview published Sunday.

Mechanisms are now in place in the European Union to deal with debt
crises of Eurozone member states, Bini Smaghi told German weekly Welt am
Sonntag (WamS). “The euro is not in danger,” he stressed.

Still, the central banker warned that the risks related to the
Irish debt crisis will grow the longer the country waits to call for
aid. “There’s also the risk of a contagion of other highly indebted
Eurozone countries,” he said.

(Late Sunday night, Ireland formally requested aid from the
European Union and International Monetary Fund. That aid package, the
details of which will be negotiated over the next several weeks, is
expected to be about E80 billion to E90 billion, source told Market News
International.)

The systemic risks would be bigger if a large economy in the
Eurozone such as Spain would be affected, Bini Smaghi acknowledged.
Meanwhile, Greece is on a good path to getting its fiscal situation in
order, he said.

German efforts to make creditors participate in future bailouts of
Eurozone member states risk driving away investors in droves, the ECB
Executive board member reasoned. “This would be a sheer recipe for a
catastrophe,” he warned.

The refinancing costs of fiscally ailing Eurozone member states
would then increase further, and in the end taxpayers would have to
shoulder an even larger burden, he argued.

Commenting on the economy, Bini Smaghi reaffirmed that the risk of
a renewed recession in the Eurozone has markedly decreased since spring.

“We see no signs for a deflation,” he said. There’s evidence that
the Eurozone recovery is slowly becoming self-sustaining. “The economy
is still fragile but there’s no risk that it will fall back into
recession again, also not the U.S.,” he said.

Turning to monetary policy, the Executive Board member vowed that
the ECB will not miss the right moment to hike interest rates.

“Obviously, we would create new dangers if we would keep interest
rates too long too low. But we won’t do that. We won’t act too late,”
he said.

–Berlin bureau: +49-30-22 62 05 80; email: twidder@marketnews.com

[TOPICS: M$$EC$,M$X$$$,MT$$$$,MGX$$$,M$$CR$,M$$FX$]