–Adds Comments On EMU debt Crisis, Japan, Libya, ECB Balance Sheet

HELSINKI (MNI) – The European Central Bank must be careful to
ensure that no price spiral takes hold in the Eurozone, even as data
show that longer-term inflation expectations are somewhat above the
ECB’s objective of just under 2%, Governing Council member Erkki
Liikanen said Thursday.

“We must take care that no [inflation] spiral occurs and that the
pressures relating to food prices and other commodities don’t affect
other prices,” Liikanen, who heads the Bank of Finland, said in a press
conference at which he presented the bank’s most recent bulletin.

“Monetary policy cannot affect [international commodity] prices,
but the ECB must of course make its decisions taking these factors into
consideration,” he said.

Liikanen cited data showing that inflation expectations in the
Eurozone are “at less than 2.5% at the moment but more than 2%.”

“It’s hard to predict whether we’ll have a food [price] crisis
similar to what we had three years ago,” he said. “It’s clear that if
there’s a shock on the supply side, it will affect prices.”

Liikanen also noted that the crisis in Japan and the sharp rise of
energy prices in recent months had changed the outlook compared with
late last year. However, “major trends in the global economy are
unchanged,” he said.

With regard, to Japan, however, “there is a lot of uncertainty and
downside risks — there is a ‘black swan,'” Liikanen said. “The question
is so large and open that I don’t want to go more closely into it. As
Chairman of the Finnish Red Cross, I emphasize that this is a human
catastrophe.”

With regard, to the unfolding military situation in Libya, Liikanen
said, “Libya’s share of oil production is small, [and] this has to be
remembered on the volume side.”

Liikanen declined to comment on the deterioriating situation in
Portugal, noting that it will be addressed by EU leaders at their summit
in Brussels, which starts later today.

Portuguese Prime Minister Jose Socrates resigned Wednesday evening
after parliament rejected his government’s package of new austerity
measures, which had been strongly endorsed by the country’s European
partners, including the European Commission and the ECB.

The resignation throws the country into political chaos and sends
Socrates to today’s summit in a caretaker capacity, and empty-handed. It
also would seem to increase the likelihood that Lisbon will be forced to
seek aid from the European Financial Stability Facility and the IMF,
with financial markets pushing yields on Portuguese debt to levels that
would make it extremely difficult for Lisbon to finance its needs.

In late morning trading Thursday, the Portuguese 5-year bond was
yielding 7.68% and the 10-year bond was at 7.6%, down from over 8% on
Wednesday but still widely considered to be unsustainable.

However, the lack of a government, and therefore of any clear
mandate, could complicate efforts for Portugal to request aid, even if
it were left with little choice.

Addressing the Eurozone sovereign debt crisis more generally,
Liikanen noted that Greece and Ireland already have aid packages in
place, tied to specific policy commitments to reduce deficits and debt
and restructure their economies. It is important that countries with aid
plans in place “implement all decisions, in order to help growth. The
question is not just about budget cuts,” Liikanen said.

He also said he was “happy that Spain and Italy are stabilizing
their economies.”

With regard to how ECB monetary policy [with a rate hike widely
expected in April] might affect the sovereign debt crisis in the
Eurozone’s periphery, Liikanen repeated the central bank’s line that
“monetary policy is also made taking the whole [euro] area into
consideration.” It’s up to national governments to take the decisions
required for macroeconomic stability, he said.

With regard to the ECB’s ongoing bond purchasing program, Liikanen
said the ECB’s balance sheet is “strong,” and that the bank is “acting
in a way that [will allow the balance sheet] to endure it. The ECB has
taken risks into account and risk management is appropriate.”

Liikanen, who is considered a possible candidate to take over the
presidency of the ECB after Jean-Claude Trichet steps down later this
year, said it was too early to discuss the succession. “We’ll have time
to come back to it later,” he said. “The leaders of the EU countries
will make a good decision about it, I am sure.”

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