FRANKFURT – The head of Germany’s central bank is warning that the government debt crisis in the euro countries “isn’t over” despite the easing of financial market turmoil over the past several months.
Bundesbank President Jens Weidmann underlined Tuesday that the European Union needs to move ahead with reforms to keep troubles in the banking system from dragging down government finances — the proposed so-called “banking union.”
Weidmann said a “central pillar” of the new system would be to have a way to restructure or wind down busted banks, with losses absorbed by shareholders and creditors before taxpayers are asked to pay. EU leaders are expected to come up with a concrete proposal this year.
Market pressure on indebted governments such as Spain and Italy fell after the European Central Bank offered in September to buy the bonds issued by troubled members of the 17-strong group of EU countries that use the euro, if they promise to take steps to reduce their deficits. No bonds have been bought, but the mere offer has sent governments’ bond-market borrowing cost down.
Weidmann warned that was only a temporary relief. He said governments needed to fix the underlying problems — including pro-growth reforms at the national level and the troublesome link between broken banks and governments who have to borrow more to fix them. He opposed the ECB’s bond purchase offer in his role as one of 23 members of the ECB’s governing council, saying it got the central bank too involved in propping up government finances and lowered the pressure on politicians to passe politically difficult reforms.
“The crisis is not over, despite the temporary calm on financial markets,” he said, adding that reforms in France were “floundering” and remained uncertain in Cyprus and Italy. France has rejected sharp budget cuts as a way to reduce its deficit, which is above the European Union limit of 3 per cent of gross domestic product.
The Bundesbank head urged faster reforms at the European level and in the financially troubled countries, saying “only governments, and not the central bank system” can solve the crisis.
The German central bank also said it was stocking up on financial reserves against the possible risks of the ECB’s policies.
The system of the ECB and 17 national central banks faces additional risk as it loans more money and takes on more securities as collateral. The eurozone system has expanded its outstanding loans by making massive low-cost crisis loans to banks. It will take on even more risk if it ever carries through on the bond-purchase offer.
The Bundesbank on Tuesday handed over its €664 million in profits to the German Treasury. The bank’s income is primarily from interest on its holdings — in pre-crisis 2008, it made a profit of €6.3 billion. The 2012 profit reflected the €14.4 billion in provisions the bank had to make against possible losses on the assets it holds as part of the European system of central banks headed by the ECB. Last year it set aside €7.7 billion in income as reserves.
European leaders have agreed to use central bank profits on Greek government bonds to help eke out Greece’s financing needs. However, the Bundesbank didn’t say how much of its profits came from Greek bonds.