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European Central Bank chief urges swifter action on bailout

Amid fear of an economic collapse in Spain and Italy, the European Central Bank chief calls for faster action by Eurozone parliaments to implement spending cuts and approve a new bailout package.

August 10, 2011|By Edmund Sanders, Los Angeles Times
  • A trader on the floor of BinckBank investors in Amsterdam. European Central Bank chief Jean-Claude Trichet on Tuesday called on European governments, notably Italy and Spain, to "do their duty" in reducing public deficits and stabilizing their finances.
A trader on the floor of BinckBank investors in Amsterdam. European Central… (Valerie Kuypers/AFP/Getty…)

Reporting from Frankfurt, Germany — Hoping to head off investor fears that Spain and Italy could be the next European economies to collapse, the head of the European Central Bank on Tuesday urged parliaments in the 17-nation Eurozone to move faster on implementing spending cuts and approving a new bailout package.

Jean-Claude Trichet, the central bank's president, also defended its decision to temporarily intervene to bring down soaring yields on the two nations' government bonds by purchasing an unspecified amount on the secondary market.

Though some analysts criticized the purchases, Trichet told French radio Europe 1 that the step was needed to ensure price stability amid Europe's worst economic crisis since World War II.

"What we have is a problem of confidence at the moment in the international economy," he said.

The bank's intervention came after Friday's downgrade of U.S. Treasuries by credit rating agency Standard & Poor's, a move that has heightened fears that the United States and Europe could be heading back into recession.

Critics called Trichet's intervention a temporary fix, at best.

"It looks more like a road to disaster," said Hans-Peter Burghof, chairman of the banking and finance department of Germany's University of Hohenheim. "Europe needs solidarity, but we need to do it in a way that doesn't produce disastrous incentives. This means [the countries] are not responsible for their own tax systems, their own debts, their own budget. It says, 'If something goes wrong, we'll save you.'"

Burghof said Italy and Spain are strong enough to resolve their own economic problems and that the central bank should not be used to "bail out politicians." He said similar attempts by the bank to bolster bonds of Greece and Portugal failed, and both countries eventually required a bailout.

But for the time being, the central bank's intervention appears to have achieved its goal. Yields on Spanish and Italian 10-year bonds, which last week rose to what many considered unsustainable levels, have dropped, lowering the borrowing cost for Spain and Italy and providing some much-needed breathing room.

Trichet called upon the two countries to move faster to rein in their budget deficits, warning that the central bank would not be able to stabilize their bond yields indefinitely.

"What we expect is that the governments do what we consider to be their job," he said.

The Eurozone has seen three countries receive bailouts since last year — Greece, Ireland and Portugal — and investors are worried that Italy and Spain, the third- and fourth-largest Euro-based economies, could be next.

Trichet also called upon other Eurozone nations to formally approve a bailout plan that was unveiled in July. The new plan would expand the powers of the European Financial Stability Facility, a rescue fund created in 2010. Among other things, the pending reforms would enable the fund to purchase government bonds on the secondary market.

But parliaments in several European nations are not expected to approve the plan until next month, in part because many government officials are on summer vacations and parliaments are in recess.

Investors last week began to express concern that Spain and Italy's troubles might worsen before the bailout plan could be approved and that the current size of the fund — about $630 billion — would not be large enough to cope with countries as big as Spain and Italy.

Some European officials want to see the fund increased, but a few nations, particularly Germany, are opposed, fearing that they will bear the brunt of the costs.

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