–Adds Comments On ECB’s Sovereign Debt Purchases; Inflation

VIENNA (MNI) – There is no sign that inflation in the Eurozone will
move appreciably higher over the medium term, but the European Central
Bank will act swiftly to counter any threat to price stability that does
emerge, ECB Governing Council member Ewald Nowotny said Monday.

Speaking in an online chat with readers of the Austrian paper Der
Standard, Nowotny said, “we see at this time in the ECB system and also
over the middle-term no tendency toward an increase in inflation above
the ECB goal.”

He added: “This applies likewise over the long-term to the capital
markets.”

Nowotny hailed the ECB’s success at maintaining inflation below 2%
on average since the advent of the single currency 11 years ago. “This
political economic orientation is valid also for the future,” he said.
“The ECB will, as before, react quicly and effectively to all possible
tendencies of an increasing inflation rate.”

To recent suggestions for placing limits on how much so-called
“addicted banks” can borrow from the ECB, Nowotny conceded that the
problem exists, but said it “is primarily to be solved through measures
taken at the national level — similar to the splitting off of ‘bad
banks,’ for which state guarantees were given.”

Nowotny strongly opposed the suggestion from online questioners
that the Eurozone be split into two currency areas.

“This would be extremely problematic for both sides. For the
‘weaker’ member states, this would mean that their currencies would be
depreciated and they thereby would be burdened with even more expensive
euro debts,” he said. “For the ‘stronger’ member states, this would mean
an increase in their credit risk and an appreciation of their currency
that would have a negative effect. Furthermore, a split would be
problematic administratively.”

He added that, “the correct path is to set structural measures in
the weaker states to increase their competitiveness and, if necessary
and for a limited time, for the EU to support them — for example
through structural funds.”

Nowotny drew a sharp distinction between the large-scale purchases
of securities conducted by other central banks — such as the U.S.
Federal Reserve, Bank of England and the Swiss National Bank — and the
relatively small bond buying program of the ECB.

“The ECB measures with regard to the purchase of securities is in
the structure as well as in the volume not to be compared to the above
named central banks,” he said. “It is much more to correct market
imbalances that appeared in a [EMU] few states in the area of long-term
sovereign bonds…and in volume [is] very limited.”

He noted that the ECB has thus far purchased less than E70 billion
worth of sovereign Eurozone debt, “substantially less than the programs
of the other central banks.” And the ECB has also sterilized its
purchases, he noted. “The program will continue to be carried out
according to need, he said, noting that in “calmer” weeks no buying was
carried out.

However, the last couple of weeks have not been particularly calm,
with spreads on Irish, Portuguese and Greek debt widening again to
levels not seen since the height of the sovereign crisis in May. Traders
have reported seeing the ECB in the market.

Nowotny was sanguine with regard to the potential long-term risk
that the new Basel III capital ratios could dampen lending.

“Basel III is to be seen as a necessary lesson learned from the
financial crisis,” the intention of which is to “increase the resilience
of banks against [future] crises,” he said. He pointed to the goal that
“risk weighting of bank assets will be closer to actual risks.”

Nowotny conceded that, “at least in a transitional phase, it is
possible that Basel III regulations may partially decrease credit
dynamics, but through better risk weighting it will be those categories
of risk that have proven to be most problematic in the past that will be
effected.”

Regarding worries about the difficulty of increasing capital
reserves, Nowotny indicated that the long phase-in period of Basel III
would “ease” the difficulty of bank compliance.

Basel III requires banks ultimately to maintain core tier 1 capital
ratios of at least 7%, more than triple the current requirement. But
that new standard will be phased in over six years, not starting until
2013.

In response to a question about Greek bank stress tests, which have
been postponed until later this autumn, Nowotny replied that “we are
confident the measures taken in Greece will lead to stabilization.” He
said that while Greek banks were “sufficiently capitalized, they are
naturally facing the challenges posed by Greece’s sharply deteriorated
credit standing.”

On the issue of Hungary’s financial crisis — of concern to
Austria’s eastern-oriented banking system — Nowotny noted that the
Hungarian economy got into trouble with foreign currency loans due to
the appreciation of the Swiss Franc coupled with a depreciation of the
Forint. This has yet to lead to a “dramatic default on loans, but
affected households have been forced to undertake savings measures in
other areas,” he said.

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