Eurozone ‘the epicentre of global crisis’

THE eurozone is the epicentre of a global crisis that has spread throughout the financial system and governments must react swiftly, ECB president Jean-Claude Trichet warned in his most forthright statement to date.

The crisis has spread round the world, moving from small to larger countries over the past few months, aggravated by the drying up of fund markets and because of the high interconnectedness of member states, there was a rapidly rising risk of contagion, he said.

His words came as the Troika — EU, IMF and ECB — agreed to release the latest €8bn tranche of their loan to Greece almost a month later than expected and amid demands for much tougher measures to be taken by Athens in the months ahead.

The report gave a boost to plans believed to be afoot to increase the haircuts on banks, saying the “success of the programme continues to depend on the mobilising adequate financing from private sector involvement and the official sector”.

Mr Trichet, in the final weeks of his term, showed his exasperation with EU institutions and member state governments when he said that the ECB had used every possible channel for some time to get the message across to them that the situation was extremely serious.

“The crisis is systemic and must be tackled decisively. National governments as well as European institutions, must rise to the challenge and act together swiftly. Further delays are only contributing to aggravate the situation... It’s a matter of urgency they act in unison to safeguard financial stability,” he said.

“We activated all channels of communications with governments asking them to react responsibly, rapidly and fully and tackle the problem we face as it is a global challenge and we are at the epicentre of a global crisis,” he told members of the European Parliament’s economics committee.

In an impassioned response to a question, Mr Trichet said he has never been complacent and issued many warnings.

Speaking as chair of the European Systemic Risk Board set up earlier this year, he said it was now a matter or urgency that all authorities act in unison. Referring to the variety of public comments coming from politicians that has contributed to volatile markets, he said, “co-ordination and consistency of communication must be enhanced”.

He called for transparent and consistent valuation of banks’ sovereign exposures — a missing element from the July bank stress tests that drew much criticism — and said supervisors must co-ordinate efforts to strengthen bank capital.

Governments must be able to borrow from the European Financial Stability Facility (EFSF) to recapitalise their banks, including member states that had not been forced to borrow from the fund, Mr Trichet said.

Asked about giving the EFSF a licence to operate as a bank, Mr Trichet said leverage depended on the governments’ will to leverage and this must be commensurate with the gravity of the situation. He repeated that he did not believe it was appropriate for the ECB to leverage the EFSF. “The governments have all the means to do that,” he added.

The Troika, announcing the release of the latest tranche of funds to Greece, said the recession would be deeper than anticipated and recovery was only expected from 2013 onwards, although exports were rebounding.

While the government had achieved a major cut in its deficit they would miss the fiscal target for this year partly because of delays in implementing some of the agreed measures. But they believed with further measures next year they should get the deficit down to €14.9bn.

The government now needed to focus spending on growth measures and to raise €35bn from privatisation by the end of 2014. But structural reforms were essential in the public sector and the economy more broadly — where corruption is a problem and structures for assessing and collecting taxes are weak.