Tags: Europe Financial Crisis

Official: Germany Willing to Boost ECB Capital

Tuesday, 14 Dec 2010 11:54 AM

Germany would be willing to support the European Central Bank with more capital if the bank said that was necessary, a government official said — a step that would reinforce the ECB's finances as it tries to contain the continent's debt crisis.

Should the ECB ask eurozone governments to boost its capital base, it would be the first capital increase for the Frankfurt-based central bank in its 12-year history.

The bank's balance sheet has been strained over the past year as it has bought up bonds from governments with shaky finances such as Greece, Ireland and Portugal. The bond purchases, which drive down yields and stabilize bond markets, have been a key step in the easing of market turmoil in recent weeks.

The bank has been under pressure to step up its purchases to help keep surging funding costs from pushing Portugal, or more dangerously much larger Spain or Italy, into seeking an international bailout.

The bank's head, Jean-Claude Trichet, could bring up the issue of more capital at a meeting of European Union leaders on Thursday, the German official said. He was speaking on condition of anonymity because he wasn't authorized to comment publicly on the issue.

"If there was such a request, we would assess it positively," the official said.

All 16 countries that use the euro are shareholders in the ECB and Germany, as the eurozone's largest economy, has the biggest stake in the central bank.

Since May, in the wake of a 110 billion euro ($147.28 billion) rescue loan for Greece, the ECB has bought about 72 billion euros in vulnerable government bonds to support their prices and stabilize countries' borrowing costs, a key factor in the debt crisis.

In addition to the government bonds the ECB has been buying directly on secondary markets, it holds many more bonds issued by countries such as Greece, Ireland or Portugal that banks have deposited as collateral in return for supplying them with unlimited liquidity.

In November, Goldman Sachs estimated that the ECB has already purchased around 17 percent of the combined debt stock of Greece, Ireland and Portugal.

Separately, Standard & Poor's warned that Belgium may have its credit rating downgraded within six months in light of the country's ongoing political deadlock.

The agency said that prolonged political uncertainty could hurt Belgium's credit standing. As a result, it said it has revised its outlook on the country's debt to negative from stable and that a downgrade could occur within six months.

Belgium has effectively been without a government since June after an inconclusive election was followed by an inability of the parties to forge a consensus across Belgium's linguistic divide.

The agency said that it could lower its rating one notch if the lack of consensus results in the government not being able to stabilize its elevated debt levels. Belgium's government debt is estimated to reach 98.6 percent of economic output by the end of the year, the third highest level in the eurozone after Greece and Italy.

A spokesman for the Belgian Finance Ministry was not immediately able to comment.

"I think this is just a confirmation what in fact the financial market has already seen in the last two weeks," said Philippe Ledent, an economist at ING in Brussels. The spread, or difference in interest rate, Belgium has to pay on 10-year bonds compared with Germany has risen to about 1 percentage point in recent weeks.

Ledent said that for now, the S&P statement is just a warning, but that "if the political crisis would last too long, there would really be a problem for Belgium."

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