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Visco: ECB control to lower yields

Rome - The European leaders’ decision to put the European Central Bank in charge of the euro zone’s bailout funds is a key result for the EU summit and should help bring down borrowing costs, ECB Governing Council Member Ignazio Visco said on Friday.

In testimony to the Italian parliament, the Bank of Italy chief said if bond yields come down as envisaged, the European Banking Authority has agreed it will reduce its upwardly revised capital requirements for banks announced on Thursday.

He said giving the ECB responsibility for the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) was “the big news” from an EU deal on how to tackle the region’s debt crisis.

“It will no longer be an entity for which no one knows who is responsible, and which has the capacity to intervene to gather funds,” Visco said. “If this works, national bonds under attack will rise ... and EBA’s decision can be reviewed and reduced.”

The EBA revised up banks’ capitalisation requirements in view of the rising yields on euro zone debt in their portfolios.

The capital shortfall that must be plugged by Italian banks was raised to 15.37 billion euros due to their substantial holdings of Italian sovereign debt.

Asked by lawmakers about the ECB’s unwillingness to become a lender of last resort in the euro zone, Visco said it was necessary to understand the reasons why the region’s largest economy strongly opposed such a change in the bank’s remit.

“The reason the Germans are so obsessed with debt monetarisation is that they equate it with Weimar, Nazism, World War Two and the destruction of their country,” he said. “It’s a reason that should be respected. If we don’t understand each other, then we can’t have discussions.”

Credit crunch

In three hours of testimony, Visco said decisions taken by the ECB on Thursday would help banks overcome a marked fall in wholesale funding that could have led to a credit crunch and hit the real economy.

The ECB cut its main interest rate to 1 percent from 1.25 percent, announced three-year longer-term refinancing operations, reduced collateral requirements for ECB funding, and halved reserve requirements for central bank deposits.

Italy’s latest 30-billion euros austerity package will weigh on growth, but was necessary to avoid far worse damage to the economy, Visco said.

The austerity measures were made up largely of higher revenues, accounting for around two-thirds of the fiscal correction, and would subtract roughly 0.5 of a percentage point from economic growth over the next two years.

However, the plan was still necessary “to re-establish the credit-worthiness of the state and to avoid extremely serious and lasting consequences for the real economy”.

Italian benchmark bond yields, which stood at around 6.5 percent on Friday, need to fall to around 5 percent to avoid negative consequences for the real economy, he said.

Italian gross domestic product will fall next year and post “modest growth” in 2013, Visco said in comments in line with the government’s official forecasts of a contraction of 0.4 percent in 2012, and marginal growth of 0.3 percent the year after.

Visco applauded the pension reform incorporated in the plan, saying it made Italy’s pension system financially sustainable and completed the long process of adjusting to an ageing population that had begun to be adopted in previous years.

In other remarks, Visco said a European ratings agency was “a good idea” and took a swipe at the three main ratings agencies, calling for more transparency and competition.

He said there was an issue of “who controls the controllers” and he would like to know how much they spend on research.

Looking at the broader euro zone debt crisis, he said fast and bold action was required “at the national, European and global level.”
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