October 11, 2011

European Debt Crisis Systemic: Trichet

Risk of contagion is "rapidly rising"

Jean-Claude Trichet, who not only heads the European Central Bank (ECB) but also the European Systemic Risk Board (ESRB), told the European Parliament's Committee on Economic and Monetary Affairs on Tuesday that the sovereign debt crisis in Europe has become systemic and that the risk of contagion was increasing rapidly. Still, he said that the European Financial Stability Facility (EFSF) should be made as flexible as possible, but without the involvement of the ECB.

Bloomberg reported that he told lawmakers, “The crisis has reached a systemic dimension. Sovereign stress has moved from smaller economies to some of the larger countries. The crisis is systemic and must be tackled decisively.”

Reuters reported that he warned against any delay: "The high interconnectedness in the EU financial system has led to a rapidly rising risk of significant contagion. It threatens financial stability in the EU as a whole and adversely impacts the real economy in Europe and beyond. It is a matter of urgency that all authorities act in unison, with total commitment to safeguarding financial stability."

Leaders have been trying to find a way to boost the capabilities of the EFSF without increasing its actual size. One suggestion has been leverage, but the ECB itself has been opposed to that, with Trichet saying in his role as ECB president, “We don’t consider it appropriate for us to leverage the EFSF.” On Monday Vitor Constancio, ECB vice president, had suggested increasing the EFSF’s capabilities through government guarantees instead of the central bank’s market operations.

While the ESRB has no enforcement abilities, it can make public its concerns as a means of pressuring nations to take action if it is dissatisfied with their response.

Trichet also called for authorities to act on recapitalizing banks, suggesting that the EFSF could assist with the job.

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