IMF suggests bigger ECB role in debt crisis
Source: Agencies |
July 19, 2012, Thursday
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Print Edition
Print Edition
THE European Central Bank could play a bigger role in fighting the eurozone sovereign debt crisis through more rate cuts, bond purchases and further liquidity provision, the International Monetary Fund said in a report on the eurozone.
The IMF also said the independent ECB, which is legally forbidden to finance governments, could be given full lender-of-last-resort functions, to help break the vicious circle of highly indebted governments borrowing from banks which in turn become vulnerable due to the risk associated with bonds.
"The ECB can provide further defenses against an escalation of the crisis," the report said.
"These could include policies to support demand in the short run and fend off downside risks to inflation, as well as measures to ensure that monetary transmission, currently impaired by financial stress in some countries," the IMF said. "And to further strengthen its financial market role, the ECB could also be given explicit responsibility for financial stability and full lender-of-last-resort functions, thereby eliminating bank-sovereign linkages present in the current Emergency Liquidity Assistance scheme."
The IMF said the ECB could further lower borrowing costs, which are currently at a record low of 0.75 percent, because the economy was weak and inflation risks small.
The bank could try quantitative easing with "sizable" sovereign bond purchases, possibly pre-announced over a given period of time, it said.
"Buying a representative portfolio of long-term government bonds - for example, defined equitably across the euro area by GDP weights - would also provide a measure of added stability to stressed sovereign markets," the IMF said.
"However, QE would likely also contribute to lower yields in already 'low yield' countries, including Germany," it added.
The IMF also said the independent ECB, which is legally forbidden to finance governments, could be given full lender-of-last-resort functions, to help break the vicious circle of highly indebted governments borrowing from banks which in turn become vulnerable due to the risk associated with bonds.
"The ECB can provide further defenses against an escalation of the crisis," the report said.
"These could include policies to support demand in the short run and fend off downside risks to inflation, as well as measures to ensure that monetary transmission, currently impaired by financial stress in some countries," the IMF said. "And to further strengthen its financial market role, the ECB could also be given explicit responsibility for financial stability and full lender-of-last-resort functions, thereby eliminating bank-sovereign linkages present in the current Emergency Liquidity Assistance scheme."
The IMF said the ECB could further lower borrowing costs, which are currently at a record low of 0.75 percent, because the economy was weak and inflation risks small.
The bank could try quantitative easing with "sizable" sovereign bond purchases, possibly pre-announced over a given period of time, it said.
"Buying a representative portfolio of long-term government bonds - for example, defined equitably across the euro area by GDP weights - would also provide a measure of added stability to stressed sovereign markets," the IMF said.
"However, QE would likely also contribute to lower yields in already 'low yield' countries, including Germany," it added.
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