–ECB Should Adapt Rules To Ease Burden On Ireland And Portgual

By Brai Odion-Esene

WASHINGTON (MNI) – There should be a greater willingness on the
part of Greece’s eurozone lenders, and the IMF, to meaningfully reduce
the interest rates on the loans that are currently outstanding and to be
provided, the head of the Institute of International Finance said
Thursday.

The IIF Managing Director Charles Dallara also urged the European
Central Bank, through its bond-buying plan, to do more to bolster the
progress made by Ireland and Portugal.

“We may not be able to wait until they have completely restored
market access to then allow them to receive the benefits of the OMT
program,” he warned during a press briefing.

On Greece, Dallara urged the eurozone to lower the effective rates
on the loans to the struggling nation to around 1% from current levels
of 4%, which he said would still enable Europe to cover the cost of the
funds.

The ECB should also do likewise, he added, citing the example of a
private sector that wiped out 70%-plus of claims on Greece and cut the
interest rates on the remaining debt.

“There’s no reason why the eurozone needs to continue to charge
Greece the rates it is charging today. It would accelerate their
(Greece) restoration of credit-worthiness if they look at that,” Dallara
said.

He argued that a combination of Greece sorting out with its lenders
what budget cuts are needed in 2012, interest rate reductions and an
extension of the timetable would provide a “more realistic” framework.

Dallara warned that none of the fiscal efforts being forced on
embattled eurozone members “will not be sufficient to preserve the
integrity of the euro,” and stressed the need to get out of the
“contractionary economic reality” that persists in Europe by focusing
more on structural adjustment efforts.

He said in pushing for reforms in peripheral Euro Area nations, the
focus needs to be much less on short-term deficit-to-GDP targets and
more on evaluating the actions of policymakers in a
“cyclically-adujsted, long term structural context.

“There needs to be a re-orientation that is forward-looking,” he
said. “It means that we would not be focusing so much on slippage of
Greece, or Spain, or Portugal in meeting next month’s or next quarter’s
budget targets. It would mean we are focusing on are they addressing the
underlying root causes of their fiscal imbalances and are they moving in
a direction that will help re-establish credibility to fiscal policies,
and help either renew or sustain market access.”

Pressure on Greece in particular needs to be eased, Dallara said,
citing the difficulty of pursuing reforms in the context of an economic
contraction.

“It’s extraordinary to see any country, frankly, pursuing fiscal
and economic reforms in the phase of a 20% contraction in their economy
over a three-year period,” he said.

Early last month, the ECB said it would buy the bonds of any
eurozone country that applied for a bailout, but Dallara argued that the
central bank’s support should be extended to EMU nations that are
already in a financial aid program and making good progress — like
Portugal and Ireland.

Under the current rules, the ECB’s Outright Monetary Transactions
may only be considered for member states currently under a macroeconomic
adjustment programme when they will be regaining bond market access.

“We would continue to encourage the ECB to take another look at the
way they are approaching Portugal and Ireland,” he said. “These are
countries that have made tremendous efforts over the last two or so
years.”

Both countries, he noted, are “marching uphill” in the face of very
high unemployment as well as difficult political enviroments to pass the
needed reforms.

So in his view, “They have earned the right to have some wind at
their back,” Dallara said. “Serious consideration should be given to
adapting the rules of the game according to the ECB for those
countries.”

Rather than waiting for those countries to regain market access,
the ECB, Dallara said, “could be an effective catalyst to create a
little additional momentum and support” for Ireland and Portgual that
could make a difference in terms of market confidence and accelerating
the restoration of market accss.

** MNI Washington Bureau: 202-371-2121 **

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