Portuguese president calls for larger central bank role in euro crisis

November 11, 2011

The European Central Bank should begin aggressively buying the bonds of troubled countries such as Italy to halt the region’s financial crisis, the president of Portugal said in an interview that took aim at the failure of Europe’s core leaders to take more decisive action.

“This is a systemic crisis that took too long for Europe’s leaders to be aware of,” President Anibal Cavaco Silva said during a U.S. trip to court investment for the country and make the case that Portugal intends to stick by the terms of a $110 billion European and International Monetary Fund bailout. “At this stage, there is a clear solution — the European Central Bank.”

The role of the ECB is a central issue in the debate over the European crisis. The United States, United Kingdom and other outside parties are pushing for the bank to take a more active role as the ultimate guarantor of debts issued by the 17 nations that use the euro. That would make it more akin to the Federal Reserve and the Bank of England, but it runs afoul of the treaty underlying the euro, which forbids the central bank from funding national governments.

It also rubs against the economic philosophy of the euro’s major power, Germany, which regards central bank support of national debt as a recipe for inflation — a paramount economic evil to Germans, whose history is tainted by the rise of the Nazi party during a period of hyperinflation.

But as the European crisis has lingered, raising the direct threat that the euro currency union might break apart under its strain, a growing number of analysts have argued that only the ECB’s unlimited balance sheet and ability to print euros can stop market runs against Italian, Spanish or other bonds.

An open commitment by the ECB would hold down borrowing costs for those countries, Silva said, and bring normalcy back to the euro region’s bond markets. That would end the cycle of crises that has driven Greece, Ireland and Portugal to seek international bailouts over the last year and a half.

“There should always be a lender of last resort,” Silva said, adding that the bank could pressure countries toward fiscal discipline as needed.

Of the three countries in bailout programs, Portugal is riding a middle ground. It has stuck closely to its deficit reduction targets, and Silva insisted the country would repay all of its outstanding bonds — and not seek the type of restructuring that will wipe away about 50 percent of Greece’s debts.

But it has not had the same success as Ireland in turning its economy around and, according to the latest European Union forecasts, will face a continuing and deeper-than-expected recession through next year. The small nation, Silva said, will by necessity have to rely on exports for economic growth — a challenge at a time when its key markets in the rest of Europe may also be slipping into recession.

Yet unlike Italy, where fractured internal politics have undercut confidence in the country’s ability to follow through on economic reforms, Silva said that Portugal’s latest budget passed with a strong majority.

In an era when “political risk” is being punished swiftly in European markets, that’s an asset, he said.

“We are lucky in that respect,” said Silva, 71. “The government is very determined to comply with all the measures” in the loan program set up by the IMF.

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