Wednesday, April 28, 2010

Cost Of Insuring Portugal Debt Hits Record High

ECB's Stark Warns Of Full-Blown Sovereign Debt Crisis

Wed Apr 28, 2010 5:30am EDT
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By Marc Jones, Reuters | 28 April 2010

(Reuters)— The onus is on governments to ensure financial market troubles do not develop into a full blown sovereign debt crisis, European Central Bank Executive Board member Juergen Stark said on Wednesday. In a speech given in Berlin in the wake of Greece's recent request for euro zone and IMF aid, Stark sent a fresh warning to governments.

"The current trend in fiscal policies is simply not sustainable. … The onus is now on governments to ensure that the crisis that initially affected the financial sector, and subsequently the real economy, does not lead to a full-blown sovereign debt crisis.

"Averting it will require very ambitious and credible fiscal consolidation efforts. In fact, substantially stronger consolidation efforts than those conceived so far."

The speech closely mirrored one he recently gave in Washington. It also echoed remarks from the IMF in its recent World Economic Outlook, which warned the Greek situation "could turn into a full-blown sovereign debt crisis, leading to some contagion". On Tuesday, rating agency S&P added to the woes, cutting Greek debt to junk status. Worries about other euro zone members were also stoked as S&P cut Portugal's rating by a chunky two notches to A-.

However, Stark said separately that there is no comparison between the situations of Portugal and Greece. "I see no connection between Portugal and Greece, Greece is an individual case," Stark told reporters in Berlin when asked if Portugal was being treated unfairly by markets. Asked if the ECB was discussing buying Greek bonds, Stark said: "I think this is not an issue".

Later on Wednesday ECB President Jean-Claude Trichet and IMF chief Dominique Strauss-Kahn will brief German political leaders on the latest plans to help Greece.

Carefully Watching Prices

Stark reiterated that record low euro zone interest rates were "appropriate" against a background of subdued inflation and lingering questions on the health of the economy. He said the euro-zone rebound would lag the United States this year but repeated the ECB was in a position to gradually unwind the support measures— mainly accommodative lending to banks— brought in during the crisis. Axel Weber, an ECB member and head of Germany's Bundesbank, warned recently that inflation risk were now on the upside. Stark, a German like Weber, is seen as one of the ECB's fiercest inflation fighters.

"We expect inflation in the euro area to remain moderate over the policy-relevant horizon," Stark said. He did, however, give a nod to rising commodity prices and strong growth in advancing economies. He said the ECB would "follow very carefully all developments in particular price developments in commodity markets and in the emerging market economies, and their impact on global inflation trends."

He also said the impact of the current fiscal woes needed to be monitored. The ECB kept interest rates at a 1.0 percent for the 11th month running this month and put a heavy focus on the debt problems facing governments such as Greece in its post-decision statement. Economists have been pushing back expectations for the first ECB rate hike into next year in the wake of Greece's problems.



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