FRANKFURT (MNI) – The agreement reached among Eurozone members last
weekend regarding assistance for Greece marks a “key turning point”
in the crisis, European Central Bank Executive Board member Lorenzo
Bini Smaghi said.

“This announcement makes it clear what the euro area authorities
have said since many months, i.e. that a scenario of default and exit
from the euro area, which some market participants and observers had
toyed with, was simply absurd,” the central banker added in a speech
given in Kyoto, Japan, on Thursday.

Over the weekend, Eurozone finance ministers had agreed to extend
E3 billion in contingency loans to the Mediterranean country this year
and more in subsequent years if needed. The International Monetary Fund
(IMF) would co-finance the loan and provide up to E15 billion in
additional funds, the ministers added.

“This will enable Greece to implement its adjustment programme
without loosing market access and ensuring a sustainable burden of the
debt,” Bini Smaghi said.

The situation in Greece also highlighted “the self reinforcing
nature of market trends”, and that decisions made by authorities to stop
growing speculative actions “has to be firm”.

“Vague statements that some event, such as a default, will not
occur, are not sufficient to calm the markets,” Bini Smaghi said.
“Concrete actions are needed. This was not fully understood over the
last few months.”

The central banker also criticized the role of rating agencies,
suggesting that they hadn’t been properly doing their jobs.

“We have seen rating agencies not acting as rating agencies, when
they stated that they had to wait for the reaction of the markets before
assessing whether the corrective measures taken by Greece were
sufficient to change their view.

Turning to the main topic of his speech, Bini Smaghi stressed that,
while “deep and efficient financial markets” contribute to economic
growth, the recent crisis has shown the dangers of financial firms
growing “too large”.

However, care must be taken not to limit financial markets to the
point where such action would impair economic growth, he added.

“Ensuring that the financial sector is large enough to strengthen
the economy while not being “too large” is a task that we take very
seriously,” Bini Smaghi said. “There is a clear trade-off between
economic growth and financial stability, and it is a difficult but
critical task to strike a good balance, ensuring that we end up neither
with too little growth nor with too little stability.”

–Frankfurt bureau: +49-69-720 142, email: frankfurt@marketnews.com

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