— Updating With Comments On QE, Eurobonds

FRANKFURT (MNI) – Departing European Central Bank Executive Board
member Lorenzo Bini Smaghi hinted Thursday that the ECB could take more
aggressive action to intervene in government bond markets.

In his last interview before retiring from the ECB’s Executive
Board, Bini Smaghi argued that while the “concept of lender of last
resort to governments is misplaced” the ECB could intervene more heavily
on bond markets for monetary policy reasons.

“The mandate of the ECB is to implement the single monetary policy
of the euro area, with the objective of price stability,” Bini Smaghi
said.

With respect to implementing a common monetary policy “the current
spreads along the whole yield curve may raise some doubts about whether
we indeed have a single monetary policy in the euro area today and
whether the ECB is indeed fulfilling its mandate,” he noted.

“If the issue is not one of solvency [of governments] but rather
liquidity, then the ECB has room for action — one could even say that
the ECB has a duty of action — to make sure that it indeed implements a
single monetary policy,” Bini Smaghi said.

Bini Smaghi also would not exclude the option of quantitative
easing in the Eurozone should conditions require.

“I do not understand the quasi-religious discussions about
quantitative easing. It is appropriate if economic conditions justify
it, in particular in countries facing a liquidity trap that may lead to
deflation,” he said.

Bini Smaghi noted that currently there are no risks of deflation
calling for such policies in the Eurozone, but “if conditions changed
and the need to further increase liquidity emerged, I would see no
reason why such an instrument, tailor made for the specific
characteristics of the euro area, should not be used. ”

Bini Smaghi said that personally he does not think that introducing
Eurobonds would be the best solution for the crisis but that he can
envisage limited underwriting of common debt.

“Maintaining the discipline of markets with respect to national
budgets may lead to better outcomes than an integrated or federal
budget,” he said.

“I could nevertheless envisage a limited amount of joint and
several issuance to finance, for instance, specific projects,
pan-European infrastructure or a common bank restructuring fund. Such a
fund would be needed to support a more centralized system of euro area
supervision,” he said.

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–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com

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