ECB ‘stretched’ as buyer of last resort, says finance chief

THE European Central Bank is “being stretched” in its current role as buyer of last resort for European sovereign debt, the head of a global association of financial institutions has said.

Charles Dallara, managing director of the Institute of International Finance, said the ECB’s burden will be eased in late September or early October, when governments approve changes to the euro rescue fund. Eurozone leaders last month announced plans to allow the European Financial Stability Facility to buy bonds on the secondary market.

“Ultimately the burden on the ECB is going to need to be eased by some degree of fiscal integration and fiscal consolidation,” Mr Dallara said. Governments should look beyond current proposals, such as a proposed financial transaction tax, which he called “very questionable.”

The ECB snapped a five-month hiatus to buy €22 billion of government bonds last week and has bought more securities since. That helped push 10-year Spanish and Italian yields below 5% after they surged to euro-era records of more than 6% amid concern contagion from the debt crisis had infected both countries.

The IIF, which represents more than 400 banks and insurance companies, has played a central role in efforts to coordinate private-sector participation in the second bailout of Greece.

The rescue package calls for investors to contribute about €50bn. So far, 39 banks from Germany, France and other European nations have agreed to take part, according to the IIF’s website.

“It’s a solid deal,” Mr Dallara said. “It will come together successfully over the course of the coming weeks.”

Greece’s initial €110bn rescue consists of loans from euro-area governments and the IMF.

The market’s current concerns are broader than worries over whether the Greek rescue package will be completed on time, Mr Dallara said. Markets and governments are in a “tug of war” over the pace of fiscal integration within Europe.

“The markets have not yet seen the conviction, the timetable, the force and breadth of determination that they are looking for toward fiscal integration.

“Governments have to realise that there is no obligation to markets to come in and buy billions of dollars worth of Italian government paper or Spanish government paper every week.

“The governments have little option but to actually strengthen their credibility with the markets.”