VIENNA (MNI) – The two-notch downgrade of Italy last Friday by
Standard & Poor’s is “extremely problematic” and demonstrates the
pro-cyclical affects that rating agencies can have, European Central
Bank Governing Council member Ewald Nowotny said Tuesday.

“The S&P downgrade of Italy by two notches is extremely problematic
because it ignores the substantial efforts by the Italian government,”
Nowotny told reporters on the sidelines of Euromoney’s annual CEE
conference here.

He stressed that the rating agency had not “given Italy the time”
or “waited long enough” to “see the results of these efforts.”

“In my view this is one of the examples of a procyclical effect of
rating agencies which we have to think about,” Nowotny added.

However, he stressed that he was “not in the club of rating agency
bashers.”

“Rating Agencies do have an economic role to play, because capital
markets have the problem of asymmetric information, and their role
should be to provide adequate information,” he explained.

As for the downgrade of Austria, whose central bank he heads,
Nowotny noted that it was “to a certain extent politically motivated,
but not without cause.”

“In Austria we do have two additional aspects to the situation: On
one hand, the budget side where it is quite clear that we have the
intention to improve the [situation]; and on the other hand the
situation in Hungary where Austrian banks have a large position, but not
too massive,” Nowotny noted.

On the subject of banks, he cautioned that banking capital
requirements “should not restrict lending.”

Therefore, he was very critical about the European Banking
Authority’s requirement for banks to meet a 9% core tier 1 capital ratio
by mid-year.

“This is not very fortunate, because it increases the problems,”
Nowotny argued.

He stressed that “the main cause for the dramatic deterioration of
the fiscal positions in Europe is the crisis and the only long-term
solution is higher growth.”

Speaking about the possibility of jointly issued “Eurobonds,” he
asserted that now was not the time to discuss them. “The question is who
is paying for these bonds and guaranteeing these bonds. You have to have
some united European fiscal body, and only this body can then be the
relevant actor for these Eurobonds,” he said. “We are of course having a
number of discussions to increase fiscal [policy] similarities and
solidity. After this discussion it will make sense to discuss Eurobonds,
but not now.”

For Nowotny, Central and Eastern Europe will remain a growth
region. He said Austrian banks would live up to their commitments there,
promising that “there will be no deleveraging” by Austrian banks.

“In the CEE region, growth will happen at a slower rate because you
cannot have this speed of convergence for a long period of time. But the
convergence will continue and from 2013 we see a better development and
we have very differentiated developments in the different countries. But
it is and remains the fastest growing region in Europe,” Nowotny said.

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