FRANKFURT (MNI) – Fixing banks balance sheets is key for an ongoing
recovery, European Central Bank Vice-President Vitor Constancio said on
Friday.

“Repairing balance sheets of banks and making banks more resilient
is a crucial prerequisite for the resumption of growth and for financing
the reallocation of resources from the non-traded to the traded
sectors,” Constancio said.

“Many policy initiatives have already been taken in this respect,
ranging from the establishment of “bad banks” to injections of capital
and government guarantees’ for bank debt,” he said.

More is in the cards now with the Eurozone undergoing banking
stress tests and policymakers assuring that national governments stand
ready to meet any recapitalization needs.

Similarly, “convincing fiscal consolidation to redress the fiscal
imbalance is essential,” Constancio said.

“Given the impairment of the credibility of the fiscal policy in
many countries, postponing adjustment is simply no longer an option.
Markets need to be convinced right now,” he asserted.

The ECB vice-president warned that a number of countries facing
fiscal consolidation challenges are set to face slow growth in domestic
demand in the months ahead.

“Countries that have accumulated imbalances thus now face a long
and painful process of adjustment to more warranted levels of spending
and debt in both public and the private sectors,” he predicted.

“A process of de-leveraging and balance sheet reparation will have
to take place in several cases. These adjustments will inevitably entail
a period of low growth in domestic demand,” Constancio noted.

To counter weak demand, “corrective adjustments of prices and
wages” are needed to boost exports and rebalance economies in question,
he said.

Overall, the euro area has “responded adequately” to the crisis and
could emerge as a stronger union if appropriate reforms are enacted,
Constancio said.

“Even though one might occasionally speak of some procrastination,
which is understandable in a complex framework integrating several
countries, important, bold decisions have been taken and new reform
processes have been launched,” he said.

“The currency union now must “take necessary and difficult measures
to restore fiscal positions and eliminate private sector imbalances” and
“put in place a framework of economic governance and a set of policies
to prevent a recurrence” of previous shortfalls, he added.

Constancio dismissed concerns over the survival of the euro.

“I think the opposite will turn out to be true. When both
challenges are met, the result will be a euro area that will be far more
robust, with a more resilient financial system, and with sounder fiscal
positions and a more balanced development across countries,” he said.

Constancio also emphasized that the central bank’s own action
during the crisis had always been in line with its price stability
mandate.

–Frankfurt bureau tel.: +49-69-720142. Email: jtreeck@marketnews.com

[TOPICS: M$X$$$,M$$EC$,MT$$$$,M$$CR$]