Frankfurt/Helsinki: The European Central Bank’s outgoing president laid the onus firmly on governments to resolve the debt crisis on Friday, saying the bank had done “all it could”, although analysts said the door was still open to a cut in interest rates this year.
At a time when the Bank of England and the Federal Reserve are taking further emergency steps to bolster the economy, President Jean-Claude Trichet’s ECB has indicated that it wants to return to a narrower focus on pure inflation-fighting.
There are questions over whether that will remain the case when Trichet is replaced by Italy’s Mario Draghi next month, with a broader effort to end the euro zone’s debt crisis in the offing and the bank’s role still in question.
File photo of Jean- Claude Trichet , ongoing president ECB (Bloomberg)
“The ECB has done all it could to be up to its responsibilities in exceptional circumstances,” Trichet told the Financial Times.
“The ultimate backstop is, of course, the governments. To do anything that would let governments off their responsibilities would be a recipe for failure.”
Trichet made the comments on the eve of a meeting of G20 finance officials in Paris, piling pressure on the euro zone’s leading economies to act to end the crisis that is unnerving markets and threatening to tip the bloc into recession.
Fellow ECB policymaker Erkki Liikanen echoed Trichet’s view, stressing that the ECB will not intervene indefinitely with its bond-buy plan -- a major part of its contribution to fighting the crisis which it has used to ease government borrowing costs.
“The ECB has stated it is temporary in nature,” Liikanen said of the bond-buying programme.
That was the same language that the bank has used throughout the past year on the programme, but also comes at a time when the ECB is engaged heavily in propping up Italian and Spanish bond markets.
Trichet’s refusal to take additional non-standard measures worried Berenberg bank economist Holger Schmieding.
“I find that a little scary,” Schmieding said.
“Trichet has made it plain he does not want to do much more and that leaves us in a potentially dangerous situation,” he added. “I’m afraid it would take another wave of severe financial tensions to get a different response from the ECB.”
If Greece is pushed into default, the ECB could no longer accept its government bonds as collateral from Greek banks reliant on the ECB for funds, the FT reported Trichet as saying, meaning other euro zone governments would have to backstop Greece’s financial system.
Growth worries dominate
Trichet’s final meeting as president earlier this month failed to deliver an interest rate cut to bolster growth that most analysts had seen as a long shot.
But policymakers speaking this week have tended to focus on risks that growth will be even worse than currently thought, and could even drive the euro zone into recession, bolstering expectations that the ECB could still cut interest rates this year from 1.5%.
Liikanen said euro area growth is slowing.
“The uncertainty related to growth prospects is high, and a substantial weakening in economic activity cannot be ruled out,” he said in a statement.
Economists read Trichet’s remarks as referring exclusively to the “non-standard” measures like bond-buying and pumping extra liquidity into the banking system which it has used to tackle the financial and sovereign debt crises.
Schmieding expected the bank to cut rates by 25 basis points in December, and again in March in response to weakening growth and easing price pressures.
That is in line with latest polling by Reuters, which shows most economists expect a cut before the end of the year, and a total of 50 basis points shaved off its main rates by the end of March.