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EU leaders wasted ECB support - report

Monday 19 December 2011 - by Andrew.Hickley@gfsnews.com

 EU leaders have been criticised for wasting opportunities to end the financial crisis while the European Central Bank increased its exposure to the weakest eurozone countries.

Think tank Open Europe says the ECB has been "far from inactive" in recent months but that EU leaders have not efficiently used the time bought by the central bank's measures.

In a briefing note released on Monday, Open Europe argues that the ECB is highly unlikely to step in to shore up markets having added €262bn ($341.3bn) of exposures to Portugal, Ireland, Italy, Greece and Spain to its balance sheet in an effort to help out eurozone banks.

The ECB has rolled out a heightened securities markets programme and emergency liquidity provisions in a bid to quell the sovereign debt crisis.

The ECB's balance exposure to these countries has now leapt up by 50 per cent in the past six months, reaching €706bn ($919.6bn).

Open Europe says: "Eurozone leaders have not used the time bought by ECB intervention to find a solution to the crisis. This trend does not bode well for those who call on the ECB to intervene further."


The think tank quashes hopes that the ECB will step in to become the lender of last resort for the eurozone, arguing that it "should not, will not and cannot offer the solution to the eurozone crisis which financial markets are clamouring for in terms of an unlimited financial backstop".

Commentators have argued that the ECB has to offer a backstop to help countries experiencing liquidity problems, as yields around the eurozone climb.

Highlighting the ECB's opposition to such a move, rating agency Fitch said on Friday that it could downgrade six of the eurozone's weakest member states.

But Open Europe says that legal constraints ensure that the ECB cannot step in to hammer down the yield rates of embattled sovereign states, because of the link between borrowing costs and national spending.

The bank would only be able to offer a short term liquidity boost for countries without legally imposed conditions, ensuring that "the moral hazard and risks of such a move would be massive".


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