–Adds Detail To Version Transmitted At 1629 GMT
–Key ECB Concern In The Debt Crisis To Avoid Negative Spillover

LONDON (MNI) – The risks to the European Central Bank’s balance
sheet are manageable and are not the reason behind the central bank’s
views on how the sovereign crisis in the periphery of the zone should be
tackled, Bank of Finland Governor and ECB Council Member Erkki Liikanen
has said here.

“Central banks can sometimes make losses, we know it. But the risks
from the balance sheet point of view are manageable,” he said.

The ECB’s main motivation in the sovereign debt crisis has been to
avoid wider negative effects and contagion. Liikanen stressed the ECB
stance that credit events or selective defaults should be avoided.

Speaking to the European Economic and Finance Centre here,
Liikanen said that the problem states of the zone needed to start
running primary surpluses and implement structural reforms to get growth
moving.

“It’s very important to create primary surpluses. If you don’t
create primary surpluses, it’s very difficult to have a stable path for
your fiscal or economic policies”.

IMF/EU bailouts could only provide temporary help to these states
in order to avoid contagion and “buy time”.

Responding to questions about the ECB’s monetary policy stance,
Liikanen echoed comments made by other ECB officials that the
‘strong vigilance’ mantra only meant that a rate hike at the following
policy meeting was possible but he stressed that there was no
pre-commitment.

Liikanen defended the record of the ECB in achieving inflation and
economic stability:

“Inflation expectations have remained consistent with the ECB’s
price stability target,” Liikanen said.

The euro had also “remained strong in an international context”.

Liikanen said that monetary policy – and hence the ECB itself –
could do little to counter commodity-fuelled inflation but policy had to
be set to ensure that second-round effects did not ensue.

“Monetary policy cannot do much to stop it but what monetary policy
must make sure… it doesn’t trigger second round effects”.

Above all, “it is crucial to keep inflation expectations anchored”,
Liikanen said.

–London Bureau; email: ukeditorial@marketnews.com; tel: +0442078627492

[TOPICS: M$$EC$,M$X$$$]