MADRID (MNI) – The Eurozone’s sovereign debt crisis could
deteriorate in the months ahead, European Central Bank Governing Council
member Miguel Angel Fernandez Ordonez warned on Thursday.

“It is obvious that not only have we not exited the crisis, but
rather, the information that we have been seeing shows that it is
possible that it will start to worsen again in the coming months,”
Ordonez, who heads the Bank of Spain, said at a conference here.

The exit from the crisis, he continued, will hinge on how national
governments, Europe as a whole, and global authorities respond.

“At this moment the key to our future lies in the ability of the
European institutions, the European Council and the ECB, as well as the
national governments, to act in a joint manner, each in its area of
responsibility, with the same shared objective: to halt the dangerous
dynamic in which the markets are enveloped.”

Ordonez stressed repeatedly that the current crisis was not over.
Although he declared himself “sure that now we are much better prepared
to avoid a repetition of a crisis like the current one…the problem is
that we still don’t really know how to exit from this one.”

One should not make the mistake of thinking that immediately
applying measures to deal with future crises can resolve short-term
challenges, he said.

With respect to these measures, “even if important efforts have
been made to progress toward more effective plans for crisis management,
it is true that most of these prescriptions require time for their
effective implementation, for which reason they cannot be exploited to
manage the current crisis,” he noted.

Ordonez emphasized the progress Europe has made in governance,
which he said “will make very improbable that there will emerge again a
crisis like the current one.”

The instruments decided in this area would have prevented the
current crisis had they been in place since the start of EMU, he said.

“But we still have not managed to activate the proper mechanisms to
halt the dynamic in which the markets are currently immersed,” he said.

Warning of the dangers of moral hazard in measures taken by
authorities, Ordonez noted the “broad agreement” that in designing
measures to regulate banking as well as to address sovereign debt
issues, moral hazard should be limited.

Nevertheless, he warned that allowing an entity that has behaved
irresponsibly to fail “can have undesired secondary effects of great
reach both in the banking sector as well as in the area of sovereign
debt.”

Were a member of EMU to default, this could have “very
considerable” spillover effects, he said.

“It is not reasonable to ignore these externalities,” Ordonez
added.

Turning to Spain, Ordonez urged ambitious labor market reforms and
called deficit reduction “absolutely necessary, given the attitude of
markets, whose mistrust in the sovereign debt of the countries of the
euro has been growing in the last weeks.”

Spain has taken “hard and difficult decisions” to reduce its
deficit, but it still has a “long path” before it, he said.

Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com

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