HIGHLIGHTS-ECB’s Constancio at EU assembly committee

BRUSSELS, March 23 (BestGrowthStock) – The following are comments by
European Central Bank vice-president nominee Vitor Constancio
during a pre-confirmation hearing at the European Parliament’s
Economic and Monetary Affairs Committee on Tuesday.

ON CREDIT DEFAULT SWAPS

“I am not in favour of banning products. What I said … is
that in particular CDSs should move to an organised exchange. I
think serious thought should be given to the possibility of
banning naked short-selling of CDSs. Not other instruments.
Because of the particular nature of these instruments — they
are supposed to be an insurance instrument and the way they have
been used … is that it has been abused and used for other
purposes.”

“I am not in favour of totally banning naked short-selling
of CDSs because… it would kill that market.”

ON EURO BONDS

“Euro bonds cannot be created to substitute the debt of a
particular member state. They should not be an instrument giving
the (European) Union responsibility for the debt of a specific
member state — that would be contrary to article 123.”

“The use of euro bonds to substitute and directly assist in
resolving or diminishing the problem of sovereign debt is not to
be recommended.”

ON EXCHANGE RATES:

“Monetary policy cannot and should not be used to try to
keep the exchange rate at a certain level.”

ON LIQUIDITY/CRISIS

“Interbank money markets are now functioning and so banks
have the liquidity they need.”

“It is impossible, unfortunately, to disentangle from
developments of credit … the effects of demand, which goes
down in recession and the effect of supply restrictions that
banks may have introduced. We may not really know.”

“The acute phase of the crisis has been lived through. It is
now proper that countries really start to consolidate public
finances. And that may have the positive impact on medium- and
long-term interest rates, which is very important.”

ON IMF, GREECE

“I am not in favour that Greece should go to the IMF for a
programme. We must be aware of what the IMF does — first it
defines and imposes a programme of adjustment on a country. This
has been done by a European institution. Greece had to revise
twice its initial programme as a result of the pressure from the
European institution and the programme that Greece now has is
not different from the one that the IMF would recommend. We even
presume that the programme would be the same. So no added value
from the IMF in that respect.”

“The second thing the IMF does is to lend money, which would
never be enough for the annual needs of Greece. The role of the
IMF is to be a catalyst. It is to impose programmes on
countries, provide some money and as a result of that the
countries will regain success to enter the financial markets.”

“That is something that Europe can do and should do.”

“Going to the IMF for a member of the euro area could be
interpreted internationally as some sign of weakness of our
institutions, of our framework of monetary union, and that would
be detrimental to the euro if it happened.”

“And I don’t see the need — we have the means to do it
ourselves. Why involve another institution?”

“Greece does not need a bailout, it has approved its
programme, went to the market after that, it paid more, but the
risk is higher so it is normal that it pays more (and) has
access to the market. If it needs short-term liquidity support,
Europe in my view has the instruments to do it, it has nothing
to do with a bailout because Greece will have to continue to
assume all its debt and pay normal interest rates for that
debt.”

ON PROPOSAL FOR EUROPEAN MONETARY FUND

“In my view it is not necessary to revise the (EU) treaty to
create such an institution. It can be done as reinforced
cooperation without violating articles of the treaty, including
… the so-called bailout.”

“We have to understand what bailout is. What is in the
article is that it is forbidden for the monetary union or a
country to assume debt from another member country.”

“But of course credit is not a bailout. Credit is credit. If
credit is given at interest rates that are normal, not
subsidised, then of course that cannot be construed as a
bailout.”

ON EURO BONDS

“It is not for the ECB to be involved in the issuance of
euro bonds.”

ON RATING AGENCIES

“It is important that ratings from rating agencies do not
play a role in regulatory issues.”

“It is possible that we avoid that without creating any new
agency. Agencies will continue to operate, the market will
consider them or not, but we may avoid having the use of ratings
for regulation.”

“The creation of the European agency will not change the
scene in that respect.”

ON EMF PROPOSAL

“The European monetary fund — I think it is possible. It is
not necessary, in my view, to revise the (EU) treaty to create
such a body, and I have my arguments. But I still don’t see
exactly the role that this fund would play.”

“But if it is considered that it is necessary to strengthen
the framework, then I am for it.”

ON SUPERVISION/IMBALANCES

“The two main things in my view are the following:
regulation and supervision of leverage, of total leverage.”

“Global imbalances — the problem is not solved. All major
players must understand what is at stake.”

“Big countries, with big imbalances, in both directions must
do their duty. In their long-term interest it is to cooperate.”

“Mechanisms of the Stability and Growth Pact must be
reinforced and some changes are needed in that area.”

ON GROWTH AND INFLATION

“As long as we have a depressed economy, as long as a result
of that there are no risks of inflation in the near future, then
of course monetary policy will continue to play that role of
supporting the economy.”

ON LIQUIDITY SUPPORT

“As regards … reducing the levels of liquidity support, we
are reducing them because they are not necessary any more. Money
markets have normalised, so the kind of liquidity support from
the central bank is not necessary at the same level now as when
the markets were frozen. They are not frozen any more.”

ON ECONOMIC CYCLES

“They are not so much different. If you calculate the level
of dispersion of GDP growth in member countries … you can see
that since the inception of the euro the dispersion has been
reduced. So there is more synchronisation of the economic cycle
now than at the beginning of the monetary union in 1999.”

ON STIMULUS EXIT/RISK OF DOUBLE DIP

“Regarding the risks of the possibility … of too early
exit being detrimental to the economy, there is risk of course.”

“The fact that they are now gradually withdrawn will not by
itself create a problem of a double-dip coming from that
withdrawal, I don’t see that.”

ON SYSTEMIC RISK BODY

“I have still some remaining doubts about the instruments
that are given to such a body, and the same occurs in other
countries — this point should require further reflection.”

ON BANKS, INSURANCE

“I think that banking and insurance should be dealt with
together, for all reasons, there is nowadays interpenetration of
these two sectors and the products they sell.”

“All banking and insurance groups in Europe have activity in
the other sector, so there are many justifications to have the
two together, and to have securities separately.”

“I am fully against the FSA kind of model, I think it did
not perform well in the crisis.”

ON ECONOMIC CYCLE RESERVE

“Besides the changes in standards to permit a more flexible
treatment of asset prices in periods of market stress and
illiquidity, there is a need to introduce the concept of an
economic cycle reserve along the lines proposed in the Turner
review, calculated with the same methods used in the previous
item, in order to set aside profit in good times to reduce
losses in depressive economic cycles of the future.”

ON TIMING OF REGULATORY REFORM

“There is … a risk to be avoided concerning the timing of
implementation. An immediate or quick implementation of all the
measures, particularly those on capital requirements, could
generate credit supply restrictions detrimental to economic
recovery.”

ON “TOO BIG TO FAIL”

“The problem is even becoming potentially worse by the
increase in size of surviving institutions, a situation that is
common after the crisis. Without dwelling on the arguments, let
me state that I do not believe that the problem can be solved by
a policy of systematic break-up of big institutions or by
adopting a solution of protecting only narrow banks and
distinguishing between utility and investment banks.”

Investing Tools

HIGHLIGHTS-ECB’s Constancio at EU assembly committee