FRANKFURT (MNI) – Spain’s decision to seek Eurozone aid for its
banking system was a very positive move and markets should eventually
recognize that, European Central Bank Vice-President Vitor Constancio
said Tuesday.
“What has been decided was very pre-emptive…and has certainly
contributed to stabilize very much the situation in Spain, and that
should be recognized by the markets in the end,” Constancio said during
a press briefing accompanying the ECB’s release of its mid-year
Financial Stability Report.
Constancio noted that the muted market reaction to Spain’s
announcement over the weekend was nevertheless understandable as markets
continue to digest the details of the plan.
He noted concerns that the deal could increase “the link between
banks and sovereigns” since aid money will be loaned to the government
rather than directly to banks. He noted that there may be concerns about
the senior creditor status of the permanent bailout fund, the ESM,
should the funds come from it rather than the temporary facility, the
EFSF.
Turning to the possibility of Greece exiting the Eurozone,
Constancio said that “the probability has increased, of course, yes, we
recognize that.”
However, Constancio justified not addressing the possible
consequences of a Greek exit in the ECB’s Financial Stability Report,
noting that it is close to impossible make any reliable predictions. “It
would be very difficult if not impossible to try to assess what would be
the consequences,” he said.
Moreover, any such attempt by the ECB “would not help the market
players,” he added. Constancio also said that Greece leaving the
Eurozone is not the ECB’s main scenario.
For the Eurozone as a whole, Constancio noted that financial market
tensions had grown again but stressed that situation is very different
from the one seen last November.
While last November there was a wide-spread fear threatening to
paralyze the entire system, the “markets have been focusing more on some
particular situation” within particular countries, Constancio observed.
“The effects [of the LTROs] are waning, which is natural, but by
taking out the main risks from funding of banks they have nevertheless a
lasting effect on the situation…there were lasting effects in the
calming down of markets since December,” he argued.
Constancio dismissed suggestions from Bundesbank officials that a
proper banking union would have to be accompanied by a proper fiscal
union.
“You don’t need a full-fledged fiscal union,” he asserted, noting
that contributions from banks would limit the need for public funds.
Asked how long it might take for a privately financed deposit guarantee
and bank resolution scheme to become effective, Constancio said: “It
would take some years [but] the banks would have from the start a
contingent liability.” The ESM could also provide a “backstop” if need,
he added.
–Frankfurt bureau: +49 69 720 142; email: frankfurt@marketnews.com
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