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.”