Trichet and Draghi urge EU nations to ratify rescue fund

THE current and incoming heads of the European Central Bank (ECB) demanded yesterday that governments in Europe quickly implement a strengthening of a regional bailout fund and press ahead with wider reforms.

With some eurozone states dragging their heels in approving the reform of the European Financial Stability Facility (EFSF) agreed in July, ECB President Jean-Claude Trichet and Bank of Italy Governor Mario Draghi warned that any delay risked worsening the eurozone’s debt crisis.

Draghi, who takes over from Trichet in November, also emphasised that the ECB’s sovereign bond-buying programme — which has bought breathing space in debt markets for peripheral states such as Italy and Spain in recent weeks — was a temporary measure and no substitute for fiscal reforms.

On Sunday, the head of a junior government party in Slovakia said parliament would not vote until December at the earliest on the strengthening of the €440 billion EFSF eurozone joint rescue fund agreed by EU leaders in July — much later than the early October deadline eurozone officials target.

“It is clear... that we have an absolute and total need for all of the decisions to be implemented immediately as was decided... by the different heads of state and government,” Trichet said at the conference in Paris.

Draghi, in the text of his speech posted on the Bank of Italy website, warned “delays or uncertainty in the process risk reigniting market turbulence”.

“The solvency of sovereign states has ceased to be a foregone conclusion,” Draghi said, calling for eurozone members to press ahead with austerity measures and warning that ECB bond purchases were a temporary phenomenon.

“The programme is temporary and fully sterilised; most importantly... it cannot be used to circumvent the fundamental principle of budgetary discipline,” Draghi said.

Italian Prime Minister Silvio Berlusconi’s backtracking on key measures in a proposed austerity package — which was seen as a vital condition for the ECB’s bond-buying — has alarmed his European partners in recent days.

Draghi said it was crucial for the EFSF, whose effective lending capacity was raised to €440bn by the agreement in July, to be perceived by markets as having the financial firepower to respond to the crisis.

Both he and Trichet insisted that far-reaching reforms were needed to create a solid fiscal basis for monetary union: what the Italian central banker called a “quantum leap” in governance.

“We ought to have a change in the [EU] treaty which will imply that it will be broader in scope and should imply changes in governance,” he said.

Trichet said there was a consensus that the eurozone needed a substantial strengthening of its debt rules. Future reforms could include the possibility of a central override on decision-making by countries who fail to stick to budgetary goals.

Draghi said that higher risk aversion in the wake of the financial crisis was “here to stay”, though he suggested that sovereign debt spreads were overstretched.

Trichet said governments were only half-way through the reforms needed to strengthen the fragile financial sector.