AN INCREASE in the capital of the European Central Bank (ECB) has emerged as the latest in a long line of proposals to escalate the battle against the sovereign debt crisis, as officials said an EU summit tomorrow was unlikely to lead to any drastic new initiative.
However, German support for a mooted ECB capital increase raised expectation that the Frankfurt-based institution will assess whether to take such a step when members of its governing council meets today and tomorrow for their final gathering of the year.
Such a measure would increase the ECB’s capacity to continue buying sovereign bonds and provide a cushion against any losses, but well-placed officials questioned last night whether the bank would act immediately to that end.
A major consideration here is that governments might have to inject cash directly into the bank if their national central banks lacked spare funds for that purpose.
While the precise plans of the ECB were difficult to gauge in advance of today’s meeting, its independent status means governments have no formal say over its capital. However, ECB chief Jean-Claude Trichet is expected to provide an update to EU leaders when he meets them over dinner tomorrow night in Brussels.
Mr Trichet has repeated hints in the past couple of days that EU leaders should enlarge the €750 billion bailout fund they share with the IMF. However, sources briefed on preparations for the summit say leaders remain reluctant to pursue that path in the absence of any immediate crisis.
Market tension persisted yesterday, however, as Spain paid a higher interest rate to sell bonds worth more than €2.5 billion ahead of a further sale before the weekend.
In addition, Standard Poor’s put Belgium on notice for a possible downgrade in the light of the failure of the country’s leaders to form a government after six months of talks.
At the European Parliament in Strasbourg, EU Commission chief José Manuel Barroso played down expectations of any new measures from the summit beyond a deal to proceed with a narrow revision to the Lisbon treaty.
While debate in recent days has centred on giving the €440 billion European Financial Stability Facility the power to buy sovereign bonds and increase its lending capacity, Mr Barroso told MEPs it was unwise to make “important announcements” which were not followed by concrete action.
“I think next time we have to do exactly the opposite – come with real conclusions when we are ready and that is why the commission is working very actively with all member states and with other institutions to have a comprehensive response as soon as possible.”
He dismissed the prospect of any early agreement to issue sovereign bonds with a common euro zone guarantee – known as eurobonds – an idea promoted by Luxembourg and Italy but rejected by Germany and France.
Mr Barroso also said European leaders should exercise calm in their public remarks as they were speaking to the markets. “These are extremely sensitive issues,” he said.
