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Portfolio > Economy & Markets

Rate Shocks Could Hurt Peripheral Euro Zone States: Dutch Central Bank

By Marlene Y. Satter

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The head of the Dutch central bank warned Wednesday that weaker euro zone nations could be harmed by interest rate shocks. Its concerns were voiced as the European Central Bank (ECB) said that it might further increase interest rates if inflation increases as the year goes on.

Reuters reported that the Dutch bank, led by Nout Wellink, also a member of the governing council of the ECB and chairman of the Basel Committee on Banking Supervision, made the statement in its semiannual financial stability report. Greece, Ireland, and Portugal, it said, were vulnerable to the risk, which has become greater thanks to more inflationary pressure and commodity prices on the rise.

Meanwhile, Athanasios Orphanides, also a member of the governing council of the ECB, warned at a news conference that inflationary pressures might cause the bank to raise rates. He was quoted as saying, "If the picture we have of inflation in the euro zone deteriorates from what we have seen in the past few months then certainly more adjustment would be required because our primary target is price stability in the euro zone as a whole."

Orphanides, who heads the Central Bank of Cyprus, also called the idea of a restructuring of Greek debt "a very bad idea." He added that any such action had the potential to spill over into other euro zone countries and perhaps even beyond those 17 member nations. "A restructure would be wrong," he said. "It would be undesirable for the Greek economy, for the economy of the euro zone, unnecessary and it is just a very bad idea."

He went on to say, "…It would have a chain negative reaction on other economies of Europe, possibly beyond the euro zone. It is certainly not recommended that the Greek government examine such a possibility, and certainly not for politicians in the EU [European Union] to discuss this or make comments [to this effect]."

The Dutch bank report said in part, "Just as in the run-up to the financial crisis, globally there is an oversupply of liquidity in the global financial system. Monetary policy is too loose for the world as a whole." It warned that emerging markets particularly were experiencing strong growth, bringing with that growth increases in commodity prices and growing inflationary pressures. Those factors, it said, increased the risk of interest rate shocks.

The report went on to say, "In the medium term these developments could threaten the financial stability if new bubbles in financial markets or unsustainable debt positions arise."

It also issued cautionary words about the size of Japan’s ballooning debt and the U.S. 2010 budget deficit of 10% of GDP, saying that both are concerns as well. "The risk," said the report, "is that the debt position of these countries could prove to be unsustainable in the future if reform efforts fail and these countries lose investors' confidence."

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