OUTGOING EUROPEAN Central Bank chief Jean-Claude Trichet and his successor, Mario Draghi, yesterday demanded urgent political action to bring the euro-zone crisis under control as markets once again suffered heavy losses.
Turmoil returned to European markets yesterday as major banks suffered a big sell-off of their shares.
Mr Trichet said in Paris that governments were only halfway through the reforms needed to strengthen the financial sector and he called for stricter economic governance. Saying he could imagine a “federal government” in Europe, he said measures may be required to overrule decisions by governments which persistently breach budgetary rules.
“One can imagine that tomorrow, going further than what is currently foreseen, if despite recommendations a country doesn’t take or is incapable of taking the required decisions, it should be possible to take them from the centre, from the centre of the single currency,” he said.
Mr Trichet, who retires next month, called on euro zone governments immediately to approve measures to strengthen the European Financial Stability Facility bailout fund, from which Ireland draws rescue loans.
The renewed market disruption comes amid increasing anxiety about the slowdown in the recovery of the European economy and mounting investor concern over a legal action by US regulators against 17 banks linked to the subprime mortgage scandal.
Germany’s top lender Deutsche Bank said the relentless volatility recalled the tension in markets after the Lehman Brothers bankruptcy in the autumn of 2008.
Mr Trichet’s intervention follows signs that Slovakia might not enact such reforms until December, prompting concern that the failure to overhaul the fund quickly would further undermine confidence in the markets.
Although EU Commission chief José Manuel Barroso argued yesterday that Europe is not on the brink of a new recession, senior officials are concerned that slower growth could disrupt fragile plans to steer Europe’s weakest economies out of the crisis.
Further evidence of strain emerged as the ECB reported a big increase in its purchases of sovereign bonds last week as it tries to prevent the debt crisis from spreading to Italy and Spain. It bought more than €13.3 billion, up from €6.65 billion the previous week.
Mr Draghi, who succeeds Mr Trichet in November, warned governments that the bond-buying initiative should not be taken for granted.
“The programme is temporary and fully sterilised; most importantly ... it cannot be used to circumvent the fundamental principle of budgetary discipline,” he said.
The impact of the ECB bond-buying campaign showed signs of wearing off as Italian and Spanish borrowing costs reached their highest levels in nearly a month.
The latest pressure on Italian bonds reflects concern that Rome might backtrack on a new austerity plan. Ahead of a crucial senate debate today, finance minister Giulio Tremonti dashed to Rome for emergency talks.
The price of Germany two-year and 10-year bonds hit records as demand grew for the least risky assets. However, bank sector turmoil saw the German stock market lose more than 5.3 per cent yesterday as Deutsche Bank shares fell 9 per cent.
The French stock market dropped 4.7 per cent and the Italian market lost 4.8 per cent. The London market fell 3.6 per cent as Royal Bank of Scotland lost 12 per cent of its value. Swiss banking giant Credit Suisse fell 9 per cent and Italy’s biggest banks, UniCredit and Intesa Sanpaolo, lost 7.3 per cent and 7 per respectively. The Irish market fell 3.46 per cent.
The Economic Social Research Institute says in a report published today that Ireland’s public debt may be less severe than in Government forecasts and that it may peak one year earlier than expected.
