Europe

Tuesday, July 10, 2012 - 12:28

Weidmann: ESM Delay Risky;Bigger ESM Would Strain Credibility


KARLSRUHE (MNI) - Further increasing the size of the Eurozone's rescue funds would strain the credibility of the continent's finances, European Central Bank Governing Council member Jens Weidmann said Tuesday in testimony before Germany's Constitutional Court.

Weidmann also told the court -- in a hearing over whether to grant a temporary injunction of the ESM -- that preventing the ESM rescue fund from entering into force carries the risk of fuelling market uncertainty, though he acknowledged any assessment of the consequences is "highly speculative."

While the EFSF would have enough funds to step in for the currently envisaged Spanish and Cypriot aid programs, Weidmann said an ESM delay could carry consequences if the situation in Europe were to deteriorate further in the coming weeks or months.

"In such a scenario, doubts about the adequacy of the available financial resources would cause greater uncertainty," Weidmann said. This could also increase pressure on the ECB, and therefore increase the risks for its balance sheet, Weidmann said.

Speaking more broadly, Weidmann said at the core of the crisis lay the question of "how a sustainable monetary union should be equipped." He told the court that the fiscal pact alone would not be enough to make the Eurozone sustainable.

Weidmann rejected the "bazooka" option of further increasing ESM's firepower, telling the court this would "not be credible" because any increase would have to be backed up by the Eurozone -- and Germany's -- dwindling fiscal positions.

"An increase in the volumes would put us at the limits of credibility," said Weidmann, who also heads the German Bundesbank.

Yet Weidmann acknowledged that the Eurozone rescue funds carried "considerable risks" for Germany's fiscal position. He estimated current guarantees from the rescue funds and Greek program at E120 billion, but cited various situations under which its guarantees would increase if other Eurozone countries were unable to make payments.

Weidmann suggested the court might play a role in limiting the circumstances under which Germany could take on even more financial guarantees. He cited a "gap" under which Germany's guarantees to the Eurozone could still be increased.

"One must ensure that there is no gateway for an increase in guarantees that is difficult to limit," Weidmann said.

Weidmann noted that a temporary injunction blocking ESM would not necessarily reduce the pressures on Germany's budget, given the wider crisis. He also repeated that the ESM alone will not solve the crisis.

"A quick ratification of the ESM treaty and fiscal pact is no guarantee that the crisis will not worsen," Weidmann said. ESM aid can only buy time for more structural reforms to be successful, he said.

"I do think it makes sense, in limited situations, to make time" for countries' reform efforts to work, Weidmann told the court.

Weidmann said the consequences of a Eurozone break-up were "so grave" that they mandated political action, adding that policymakers had already "underestimated" the spillover effects of Greece alone.

Weidmann was testifying as an expert at a hearing of Germany's Constitutional Court in Karlsruhe over whether to grant temporary injunctions sought against the ESM and Fiscal Compact. The injunction has been sought by opponents until the court can issue a more permanent ruling on its constitutionality.

-- Frankfurt bureau: +49 69 720 142; email: ccermak@marketnews.com

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