LISBON (MNI) – Governments throughout the Eurozone must improve
their fiscal policies so that the European Central Bank can be the one
to decide monetary policy, not the financial markets, ECB Governing
Council member Carlos Da Silva Costa said Monday.

In perhaps the most explicit admission to date by any Council
member of the degree to which financial market turbulence has hijacked
the ECB’s agenda, Costa told reporters: “We have to make our public
finances more robust so we can decide on our monetary policy, not the
markets.”

He also reiterated that the ECB’s exit from crisis-driven liquidity
policies would be a gradual one. “The dismantling [of the non-standard
measures] has not yet been announced. It does not happen overnight. It’s
going to take time,” he said.

Addressing the issue of some banks’ continuing dependence on ECB
funding — including many in Portugal — Costa said “we have to wait to
see when and how it will” be resolved. But he expressed confidence that
when the ECB finally does pull the plug on its non-standard liquidity
measures, “Portuguese banks will be able to handle it.”

He suggested that bank funding difficulties in Portugal were more a
product of public sector fiscal policies than organic banking sector
problems, predicting that, “Portuguese banks will benefit from the
reduction of sovereign risk.”

Costa, who heads the Bank of Portugal, said budget cutting measures
announced last week by the government in Lisbon “correspond to what was
expected and comply [with what is needed] to alleviate the doubts of
financial markets.”

He added: “We are on the path to sustainability, though there is
still work to do.”

Costa also asserted that the Portuguese financial system is “sound
and has practices that are above the EU average.” He said the country’s
banks are “well-managed and have the necessary contingencies.”

On the domestic economy, he noted that internal demand has slowed
in Portugal but was optimistic about the country’s foreign trade
prospects.

“There has been a slowdown of internal demand, though Portuguese
exports have been doing well and have been conquering markets,” Costa
said. “Hopefully exports will compensate for the slowdown in internal
demand.”

He noted that Portugal’s deficit, a matter of serious concern in
sovereign bond markets, was exacerbated by the financial crisis. “We
have to prepare ourselves to minimize the risk if in the future we have
another crisis,” he urged.

Costa said that a new government agency set up to monitor
Portugal’s fiscal policy will be “an independent, unbiased body that
will do technical analysis on the financial situation, the quality of
political debates, and make sure the financial situation has a long-term
vision.”

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