The European Central Bank (ECB) President Jean-Claude Trichet urged eurozone governments on Friday to slash their deficits to end the sovereign debt crisis.
Speaking in Paris, Trichet urged the 16 members of the currency union to be more flexible and effective and called for “a quantum leap in the governance of the eurozone.”
The comments came after he refused on Thursday to ignite a much-expected multibillion-euro program to buy the bonds of troubled countries. Despite this, the ECB bought Irish and Portuguese bonds on Thursday and on Friday, easing the countries’ borrowing costs.
“We are certainly encouraging governments to go as far as -possible in being commensurate to the challenges,” Trichet said on Friday. “This is true in all domains, quantitative as well as qualitative. More flexibility in their own capacity to contribute to ensuring that there is financial stability is important.”
European countries have been forced by the markets and by the EU into draconian budget cuts. Lack of trust in some nations’ ability to meet interest payments led to a recent bond sell-off that pushed the borrowing costs of Ireland, Spain and Portugal to almost unsustainable levels.
The ECB’s subtle messages of support and its purchases in the market brought relief to high-deficit countries at the end of the week. Ireland now needs to pay 8.5 percent to lure investors to its 10-year bonds, below the 9 percent it recently reached. Portugal’s 10-year bonds fell to 6 percent.
Spain, which has launched a PR offensive over the past two weeks to convince investors that it does not need a bailout, stepped up its budget-cutting measures yesterday.
Spanish Finance Minister Elena Salgado raised tax on tobacco and promised to send a pension bill to parliament at the end of next month. Spain, struggling after its property bubble burst, said earlier this week it would sell stakes in its national lottery and airports operators.
This, however, was not enough to stop the cost to insure Spanish bonds from rising.
“Without firm commitment to tackle the problem, what is essentially a liquidity and credibility issue will soon translate into a solvency issue for Spain and Portugal. The ECB needs to act boldly before the point of no return is reached,” said Pau Morilla, a portfolio -manager at London & Capital
Trichet’s comments, reiterating that the ECB would stick to its anti-inflationary “doctrine,” disappointed some investors.
“What is needed is shock and awe, rather than tentative, reactionary responses,” said Stefan Isaacs at M&G’s Bond Vigilantes Web site. “The ECB needs to get ahead of the market or it will continue to move from one weak link in the chain to the next.”
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