The European Central Bank should increase efforts to eliminate fears of contagion from the sovereign debt crisis in the eurozone, said Wednesday the chief economist at the Organization for Economic Cooperation and Development.
“We have not won the battle to curb the crisis. I think there is an element of contagion to be tackled,” said Pier Carlo Padoan in a telephone interview.
The contagion “should be avoided with the proper tools and instruments are mainly Europeans. For example, it may be a measure of the ECB as we have seen before,” he added, referring to the program to buy government debt of the ECB.
The profitability of Spanish government debt increased at the beginning of the week on fears that the country may end up needing a bailout of the entire economy after the finance ministers of the EU agreed to give a credit of up to 100,000 million euros to shore up the banking sector. The market turmoil also spread to Italy, where bond yields rose before the crucial debt auction to be held this week.
Some sources have asked the ECB to halt the advance of returns reviving its bond purchase program. However, the ECB said on Monday that the program remained suspended and did not intervene in the market for the thirteenth consecutive week.
Padoan, who said that the crisis is at a crucial moment, he added that he should leave Italy scope to implement its program of fiscal consolidation and should not let it fall by the tone in financial markets.
“These programs take time to bear fruit. While it would be really unfortunate that, because of contagion, this is not reflected in lower spreads,” he said.
As for Spain, Padoan was positive in relation to package aid to banks the country, since that considers that “head them a source of instability in the eurozone”. However, said the OECD would have preferred a direct capital injection in the states, as this would have prevented that increase the level of Spanish government debt.
Padoan said that Spanish banks should only get help when you have total transparency in their balance sheets and therefore should be funded only viable banks. ”This should be checked to ensure that the money goes into good hands,” he said.
by Jay Thadeshwar, My Profile