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BIS: Euro Area Can't Solve Crisis by Cutting Rates

Sunday, 18 Sep 2011 03:41 PM

Euro area nations battling the sovereign-debt crisis cannot remedy their problems by easing monetary policy and must instead focus on reducing their fiscal deficits, the Bank for International Settlements said.

“This is not a monetary problem so there is no monetary policy solution,” Stephen Cecchetti, head of the monetary and economic department at the Basel, Switzerland-based BIS, told reporters on a Sept. 16 conference call. “Since the fundamental problem is sovereign debt, additional monetary policy stimulus will not help.”

Traders are betting the European Central Bank will lower its benchmark rate by 21 basis points over the next 12 months to boost economic growth in the 17-member zone, according to a Credit Suisse Group AG index based on swaps. As recently as Aug. 1, the measure forecast an increase of 25 basis points following two rises in the central bank rate to 1.5 percent this year.

“The problem is sovereign debt, and the credit risk it creates, it is not liquidity per se,” said Cecchetti. “This is a problem that only governments can solve. They need to spell out clearly and credibly how they plan to put public finances on a sustainable trajectory, and how in the process they intend to ensure the soundness of their banking systems.”

The ECB and its counterparts in the U.K., Switzerland, Japan and the U.S. said Sept. 15 they’ll provide lenders with unlimited dollars for three months in three tenders starting October. They acted after dollar funding dried up for European banks as speculation Greece won’t be able to avoid a default sparked concern that euro-area lenders who hold the Mediterranean nation’s bonds would be affected.

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Euro area nations battling the sovereign-debt crisis cannot remedy their problems by easing monetary policy and must instead focus on reducing their fiscal deficits, the Bank for International Settlements said. This is not a monetary problem so there is no monetary policy...
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