Weber Says Emergency Aid for Nations Must Be Tied to `Painful' Conditions
By Simone Meier and Rainer Buergin - Oct 14, 2010 1:21 PM GMT+0200 Thu Oct 14 11:21:12 GMT 2010
European Central Bank Governing Council member
Axel Weber said future emergency support to euro- region member states must be tied to “strict and painful” conditions to encourage governments to stick to budget rules.
“A temporary financial support for member states should remain an option at best used only if there’s a clear, considerable contagion risk for the rest of the currency union and if, secondly, the use is tied to strict and painful conditions,” Weber said at an event in Berlin today. Funds should be raised by individual member nations rather than through a joint measure such as Eurobonds, he said.
European leaders are seeking ways to tighten budget-deficit rules after Greece’s debt crisis forced countries in May to pledge an unprecedented rescue package to prevent the crisis from spreading across the 16-member region. While governments from Ireland to Portugal have since stepped up spending cuts, investors remain concerned about countries’ ability to fund themselves.
“Measures for crisis management need to be tailored in a way that entails as little as possible distortion of incentives” for member states, Weber said. “That’s why it’s indispensable to credibly anchor the no-bailout principle.”
The extra yield that investors demand to hold Irish and Portuguese 10-year bonds over German bunds climbed to records as recently as Sept. 28. The Irish spread was at 397 basis points today, Spain’s at 170 points and Portugal’s at 385 points. Greece’s premium was at 656 points.
Deficit Sanctions
Weber, who is also head of Germany’s Bundesbank, called for a system of “automatic sanctions” for countries breaching the region’s budget rules. It’s important not only to monitor countries’ shortfalls but also their debt, he said. His Luxembourg colleague
Yves Mersch said in London today that he would favor “more automaticity” for sanctions and that governments’ capacity to plead “exceptional circumstances” to avoid penalties should be curtailed.
Weber’s comments come two days after he said the ECB’s purchases of government bonds “should now be phased out permanently” and that the risk of exiting too late is greater than the danger of withdrawing measures too early. The ECB started buying bonds in May to help restore confidence.
“In the current situation, which is marked by uncertainty, a credible consolidation can serve as an anchor,” Weber said today. “A continuous expansive financial policy for countries with massive household problems is” no longer an option.
(Bloomberg)
