EUROPE NEWS OCTOBER 12, 2011
ECB Chief: Europe Is 'Epicenter' of Crisis
By WILLIAM LAUNDER And TOM FAIRLESS
FRANKFURT—European Central Bank President Jean-Claude Trichet warned Tuesday that the euro-zone crisis has "reached a systemic dimension" and said governments must swiftly push through fiscal reforms and coordinate a recapitalization of banks.
"We are at the epicenter of a global crisis," Mr. Trichet said in Brussels, speaking in his role as chair of the European Systemic Risk Board, a European Union institution responsible for limiting systemic risks to the euro zone's financial system.
Mr. Trichet said the sovereign-debt crisis has spread to the banking sector as well as "to some of the larger EU countries," and warned of "a rapidly rising risk of significant contagion that threatens financial stability in the EU."
The comments mark an escalation in Mr. Trichet's diagnosis of the crisis. At the ECB's press conference in September, Mr. Trichet warned against dramatizing the situation in the banking sector, although he has since struck a more concerned tone.
Mr. Trichet stressed that a clear and coordinated decision is needed on bank recapitalizations. It would be beneficial for the European Financial Stability Facility, the euro zone's rescue fund, to lend to governments so that they can recapitalize their banks, he said. The EFSF should be as open as flexible as possible and have the appropriate leverage, he added.
However, the ECB president reiterated his opposition to leveraging the EFSF via the ECB, saying governments have the capacity to leverage the EFSF themselves.
Governments must also act "swiftly" and decisively" to implement the decisions taken at the July 21 EU summit. "Further delays are only contributing to aggravate the situation," he said.
Mr. Trichet said the ESRB is working on solutions to address the vulnerability big euro-zone banks face through dollar funding and the risk that foreign-currency lending can have in encouraging excessive economic growth.
Amid the risk that foreign currency lending leads to excessive credit growth, the ESRB further recommended that national governments tighten rules regarding lending in other currencies.
"High levels of foreign-currency lending may have systemic consequences for the countries concerned as well as potential for cross-border contagion," the ESRB said in a statement released in tandem with Mr. Trichet's comments.
The ESRB recommendation comes several weeks after major central banks moved in concert to pump dollars into the European banking system amid signs of a new liquidity crisis. The move was aimed at addressing the shortage of dollar liquidity faced by euro-zone lenders, who are increasingly shunned by U.S. banks worried that the debt crisis has infected their euro-zone peers.
