There is a lingering sense of crisis surrounding public finances in the European Union because financial programmes to support some member countries have yet to be shown to be successful, European Central Bank governing council member Christian Noyer said today.
Restructuring sovereign debt cannot be part of a solution to a sovereign crisis as it could mean a country being shut out of financial markets, Mr Noyer said.
It is important to focus on the structural reforms required of EU countries when they seek financial aid, and the benefits of reforms are not easy to measure in the short term, he said.
Euro zone finance ministers are seen likely to back a bailout package for Portugal today at a meeting that is also expected to pressure Greece to announce more austerity steps to secure further emergency funding as policy-makers struggle to contain a sovereign debt crisis.
"The persistence of the sense of crisis may also lie in the fact that the success of existing programmes remains to be demonstrated," Mr Noyer, also governor of the Bank of France, said at a seminar in Tokyo. "In that regard, one may consider the utmost importance of conditionality embedded in the programmes."
Portugal had resisted a bailout for months, mindful of the hardship and popular resentment when it called in the International Monetary Fund (IMF) in the 1970s as it emerged from decades of authoritarian rule.
But investors have pushed Lisbon's cost of borrowing to historic highs, forcing it to follow Greece and Ireland into EU/IMF protection.
A small group of euro zone finance ministers who met in Luxembourg earlier this month said last year's bailout of Greece had failed to restore confidence in the country's finances and new steps were urgently needed to alleviate its debt burden.
Sources have told Reuters they are now considering supplying more money to Greece and easing the terms of existing loans, possibly in combination with the "voluntary" involvement of Greece's private creditors.
Greece's debt crisis is the biggest challenge the region's policy-makers have faced since the launch of their bold currency experiment 12 years ago, with Greece and other countries such as Ireland and Portugal still vulnerable due to their public finances.
Some economists have argued that Greece will need to restructure its debt by forcing some of its bond holders to take a haircut, and these concerns were not lost on the Japanese government.
"Worries are growing little by little in markets about Greece's ability to redeem bonds," Rintaro Tamaki, Japan's vice finance minister for international affairs, said at the seminar.
"The next few weeks will be very crucial in terms of how Europe and the IMF will implement rescue plans for Greece."
The ECB stands ready to ensure price stability and preserve the integrity of the euro, Mr Noyer said.
Calculations based on European banks' exposure to EU sovereign debt would produce very reassuring numbers, he said.
He also predicted EU economic growth on average would be above the potential growth rate this year.
Reuters
