ECB:Fiscal Situation Still Precarious In Some Euro-Zone States
FRANKFURT -(Dow Jones)- The fiscal situation in a number of euro-zone countries remains "precarious" and the commitment to fiscal consolidation must be sustained, the European Central Bank said Monday.
Deficit-fighting measures outlined in 2011 budgets are "a first step in the right direction," but "the scale of the present fiscal challenges requires an ambitious multi-year consolidation effort in most countries," the ECB said in its annual report.
The ECB urged countries with a stronger economic outlook to use the opportunity to correct excessive deficits early. Countries that have announced measures without sufficiently specifying them should offer "more detail," the ECB said.
Greece's 2010 government deficit is likely to have been "higher than targeted" but the country's reform program "remains broadly on track" thanks to extra measures adopted in 2011, the ECB said.
Still, "additional measures in the amount of 6% of GDP still need to be specified for subsequent years" if Greece's deficit is to fall below 3% of gross domestic product by 2014, the ECB said.
In the preface to the annual report, ECB President Jean-Claude Trichet defended the bank's purchases of peripheral euro-zone government debt.
The so-called Securities Market Program enabled euro-zone central banks "to help restore a more appropriate functioning of the monetary policy transmission mechanism in the case of dysfunctional market segments," Trichet said.
The ECB started buying government bonds in May 2010 after yields on peripheral euro-zone government debt soared on concerns that some would be unable to repay their debts. By Dec. 31, the ECB had bought securities worth about EUR73.5 billion.
The report said the "overall level of risks" faced by the ECB has increased due to "increased volatility in foreign exchange rates, interest rates and gold prices, as well as higher credit risk".
The average value of collateral posted with the ECB for its liquidity-providing operations fell to EUR2.010 trillion from EUR2.034 trillion in 2009, the ECB said.
That was mainly because banks had "on average lower liquidity needs throughout 2010," the ECB said.
Still, banks kept a similar amount of collateral with euro-zone central banks as in 2009, suggesting that "a shortage of collateral has not been a systemic constraint" on banks, the ECB said.
Asset-backed securities, or notes backed by repayments on debt such as mortgages or credit-card loans, became the most popular collateral last year, making up 24% of the total, up from 23% in 2009. But the overall volume of ABS submitted remained stable, suggesting that their value rose.
Non-marketable assets, which include credit claims, rose to 18% of all collateral from 14% in 2009.
Central government bonds also grew more popular, with their share rising to 13% from 11% in 2009 "owing to the sovereign debt crisis," the ECB said.
The ECB warned that global external imbalances "began to grow again" in some areas in 2010, as the US current account deficit widened and China's current account surplus remained close to its peak in absolute terms.
To combat these imbalances, "deficit countries should reduce fiscal deficits and complete the structural reform agenda," the ECB said.
Surplus economies should boost domestic consumption, develop more extensive social safety nets, reform financial markets and increase exchange rate flexibility, the ECB said.
