ECB “sidelined” in sovereign crisis debate, says analyst

The European Central Bank (ECB) may have been sidelined in discussions to tackle sovereign debt issues in Europe, after the Eurogroup said it would provide the European Financial Stability Facility (EFSF), Europe’s temporary bail-out vehicle, with greater “flexibility and scope” to address contagion risks, an analyst has said.

The European Central Bank (ECB) may have been sidelined in discussions to tackle sovereign debt issues in Europe, after the Eurogroup said it would provide the European Financial Stability Facility (EFSF), Europe’s temporary bail-out vehicle, with greater “flexibility and scope” to address contagion risks, an analyst has said.

In a statement released on Monday, the Eurogroup said it planned to propose “concrete measures” that would strengthen the eurozone’s capacity to reduce risks associated with sovereign debt in Europe, including options to lengthen the maturities of loans and charge lower interest rates for countries currently receiving bail-out loans from the EFSF.

The Eurogroup said the plans would “improve the euro area’s systemic capacity”.

Silvio Peruzzo, a European economist at RBS, said the statement indicated that the ECB had been “sidelined”.

“For the first time, in a communication from [Eurogroup] finance ministers there are terms that underpin the position of the ECB. This to me clearly marks the fact that the discussions have been intense between the different parties and maybe the ECB has been sidelined,” Peruzzo told CentralBanking.com.

Peruzzo said the use of the words “flexibility and scope” hinted that Eurogroup ministers wanted to make sure that it was difficult for the ECB to “digest” the plans.

European policymakers have clashed over the preferred policy to address sovereign debt issues in Greece and other peripheral countries. The ECB has taken a hard line against any intervention in debt markets that constitutes a selective default. However, European finance ministers have in recent days suggested larger and more rapid haircuts on Greek debt may be necessary.

David Owens, the chief European economist at Jefferies, an investment bank, said that while he welcomed more flexibility in the EFSF. the statement had come “too late” as the situation in markets had worsened dramatically.

“They’ve not agreed to do anything that will have a discernable difference. We are waiting for developments. The dislocation seen in the markets is reflecting that,” he said.

European markets made large losses this week as concerns over the sustainability of Italy’s deficit grew. The cost of insuring an Italian default for five years has risen by 38 basis points, this week with the 5-year midpoint on Italian credit default swaps (CDS) up to 280.8 on Wednesday. Spreads on Greece, Spain, Portugal and Ireland’s CDSs also rose in trading.

Owens said the European stress tests set to be released by the European Banking Authority on Friday would be further cause for concern in markets. “At the time [of announcing the stress tests] the idea of having more transparency in the books probably all seemed very sensible. But the problem is disclosing this amount of information and giving more reason to pick off the weakest links,” he said.

Eurogroup ministers also signed a treaty establishing the European Stability Mechanism, a permanent crisis mechanism which is to replace the EFSF in 2013. The move comes after eurozone finance ministers met in Brussels over the weekend to discuss issues related to the implementation of a new programme for Greece.

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