FRANKFURT (MNI) – It is conceivable that the European Financial
Stability Facility could both recapitalize banks and buy sovereign debt,
but the decision ultimately rests with politicians, European Central
Bank Executive Board member Juergen Stark said in an interview published
over the weekend.

Any suggestion that the common currency would not survive over the
long term is “stupid,” the central banker told the Dutch newspaper Het
Financieele Dagblad.

Jointly issued government bonds with liability shared within the
monetary union, or Eurobonds, are not the solution, the ECB’s chief
economist argued.

These “would provide a disincentive to pursue sound policies at the
national level,” he explained, adding that they would “blur” the notion
that each government is responsible for its own debt.

“Some countries would enjoy lower interest rates on government
bonds. But Eurobonds would not solve their economic problems in terms of
competitiveness losses and unsustainable debt,” he reiterated.

Asked to comment on ECB President Jean-Claude Trichet’s plea that
the EFSF be improved both quantitatively and qualitatively, Stark
remarked that “a quantitative improvement would be to make the E440
billion fully available.”

“On the qualitative side, I could imagine the EFSF recapitalizing
banks or buying sovereign debt. But this issue has to be decided at the
political level,” he said.

While European leaders agreed in May to provide the fund, which
serves as a financial backstop against ailing Eurozone states, with E440
billion in guarantees, in order to protect its AAA rating, it must
retain a buffer and cannot pledge all its funds.

EFSF CEO Klaus Regling, a former German Finance Ministry official,
told German radio earlier this week that the fund can only dispense of
E250 billion if it wants to preserve its AAA rating.

Stark was apologetic but unequivocal in response to a question
about whether he was convinced that the euro would survive: “Sorry, this
is really a stupid question. The euro is a stable and well respected
currency.”

“We are not experiencing a crisis of the euro. It is the crisis of
individual member states that have lived beyond their means by fiscal
and economic policy mistakes,” he explained.

Stark repeated the ECB’s call for all Eurozone countries to bring
their fiscal position back to a “sustainable path,” emphasizing that a
stabilization of the debt level was paramount.

“Second, we need a correction of the internal imbalances in the
euro area. The deficit countries have to do their homework. It requires
bringing the external and private sector debt dynamics back on a
sustainable path,” he said.

On monetary policy, Stark noted that the ECB’s government bond
buying program is small compared to other major central banks, and
reminded that it is limited to the secondary market. “It is an
extraordinary step taken under extraordinary circumstances,” he said.

–Frankfurt bureau, +49-69-720142, tbuell@marketnews.com

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