European Central Bank President Mario Draghi said Friday that it was up to Europe’s politicians to resolve the region’s debt crisis and rejected calls that the bank take on greater risks to make sure Italy and other countries don’t default.
His remarks came amid an intensifying debate over the bank’s role in the 17-nation euro zone, where major countries are seeing their borrowing costs rise toward unsustainable levels.
Nov. 17 (Bloomberg) -- Andrew Pease, Sydney-based senior investment strategist for the Asia-Pacific region at Russell Investment Group, talks about Europe's sovereign debt crisis and its implications for global financial markets.
At issue is the question of whether anyone else could step in with the hundreds of billions of dollars that Italy, Spain and other euro-zone governments would need in coming months to fund themselves if private investors continue to turn away from European bonds for fear of a national default.
These financing needs would outstrip the current capacity of the International Monetary Fund to help. Leading governments outside the euro zone, including China, Brazil and the United States, have demanded that Europe first tap its own available means before any new steps are taken to increase the IMF’s firepower or provide other aid to the euro zone.
Analysts say the options have boiled down to two: either Germany agrees to put more of its own money at risk in a regionwide bailout fund or the ECB steps in more forcefully to buy enough bonds from Italy, Spain and other countries to ensure their borrowing costs remain at an affordable level. The ECB is already buying Italian and Spanish bonds in an effort to increase market demand for them and, thus, force down the interest rate that governments must pay to lenders.
A growing list of European leaders insisted this week that the ECB offers the quickest and most certain way to reassure investors that euro-region countries will remain solvent, with French, Spanish and Irish leaders saying bluntly that they felt it was time for bank policy to change.
From outside the euro zone, British Prime Minister David Cameron used a trip to Berlin on Friday to make the same point. Although his country continues to use the pound and not the euro, Cameron said the British economy is at risk from the euro zone’s troubles, and he told German Chancellor Angela Merkel that the currency region needs to come to terms with its problems.
“All the institutions of the euro zone have to stand behind the currency and do what is necessary to defend it,” Cameron said.
Germany does not want to become the sole financier of the euro area. But Merkel and other German leaders are also adamant that the ECB has only a limited role to play in the region’s crisis response.
Germany joined the euro region only after receiving guarantees that the ECB would be run on the same principles as the Bundesbank, the German central bank — which has a singular focus on controlling inflation, strict independence from elected officials, and little room to finance governments or engage in the type of massive bond-buying programs undertaken by the Federal Reserve to boost the U.S. economy.
Merkel, as she has throughout the crisis, said the only solution was for countries to put in place more responsible economic and fiscal policies.
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