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Trichet:Bond spreads pose no risk to eurozone
28 January 2009 @ 20:02

(Reuters) - European Central Bank President Jean-Claude Trichet said on Wednesday the recent widening of government bond premia in the euro zone posed no threat to the future of the single currency. Speaking on Reuters Television at the annual meeting of the World Economic Forum, Trichet said it was important that governments took responsibility for restoring confidence in their fiscal policies, noting there was no provision for fiscal bailouts.

"I don't think it poses any risk to full body of the euro area," Trichet told Reuters when asked about widening bond spreads. "Governments, when they devise their fiscal policy, have to take in account the Stability and Growth Pact."
"The most important constraint is not necessarily the spreads, but the confidence channel. If you don't give your own people and your own economic agents and your own households confidence in the sustainability of your long-term fiscal policy, they will lose all confidence."
"The present system of the euro zone has been that there would not be bailing out of any particular fiscal policy," Trichet said, adding that membership of the euro area helped confidence but the ultimate responsibility lay with each government.
Investors have demanded record premiums in recent months to lend to euro zone governments other than Germany, with credit rating agency downgrades for the likes of Spain, Greece and Portugal compounding this trend.
For example, the difference between German and Greek government bond yields widened to a record of more than 3 percentage points on Monday.
Earlier on Wednesday in Davos, hedge fund manager George Soros said the widening of these premia demonstrated a "structural weakness" in the euro area as the ECB accepts all member nations sovereign debt equally in its market operations.
Soros said that despite long-held objections from the likes of Germany, European governments may have to consider pooling funds to help those most affected and that would ultimately make the bloc stronger.
PROGRESS IN G20
Trichet also said there was good work being done to remedy the financial crisis by the Group of 20 top world economies, the Financial Stability Forum and other forums.
"We cannot let market economies be that fragile. We have a real stress test to the market economies at a global level. Everybody can see the present system is too fragile, and we have re-introduce an element of resilience, and we need to do that without any consideration of any kind of vested interest."
Asked about the possibility of the ECB taking on a great role in region-wide bank supervision from national supervisors, Trichet said closer cooperation was certainly desirable and noted the Maastricht Treaty on monetary union allowed for a greater ECB role if member states were unanimous.
"The (ECB) governing council position on such matters has always been, since the setting up of the ECB and the euro, that a close link was necessary between central bank and the surveillance operator," he said. "We were never in favour of a strict separation of the two institutions."
Trichet said many in the European Parliament and in the private sector were now interested in seeing what more the ECB could do in that area.
"What is true is that today we have a provision in the Maastricht Treaty -- which is provision 105.6 -- which says if there is unanimity of the governments some responsibilities in respect of the surveillance area could be given to the ECB."
"Whatever happens we need to continue improving the intimate cooperation between the banking surveillance authority and the central banks at the level of Europe as a whole and of course the euro area."
 
For full coverage, blogs and TV from Davos go to http://www.reuters.com/davos


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