Europe's new super-watchdog, the European System Risk Board (ESRB), will pinpoint problems bubbling in individual countries if they pose a risk to the wider system, the head of the new body, Jean-Claude Trichet, said on Monday. Trichet, who heads the European Central Bank, also warned against imposing discounts on the government bonds of countries mired in the euro zone debt crisis, saying it would punish those people and institutions which have invested in the bloc.
"The ESRB may also address issues in a specific country if they pose a systemic threat to the EU's financial system," Trichet told a European Parliament committee hearing. The ESRB is designed to take a bird's eye view of Europe's financial system and flag up any emerging problems for relevant authorities to act on.
It has no formal teeth, although if it is not satisfied with authorities' reactions, it has the option of going public with its fears. Trichet added the ESRB was also looking at how best to design its warnings. "The ESRB is planning how to issue warnings and recommendations for remedial policy action," he said. Asked about the possibility of Greece and Ireland reducing their debt by repaying less than the full amount on their bonds, Trichet said the countries must stick to their plans and that investors gambling against the eurozone should not be rewarded.
"The message is very simply ... apply the programme. That programme does not comprehend the kind of concept you have mentioned," he said. "The investors that are long, private sector investors are losing money when you practice this haircut you have mentioned. Those investors that are short are making money, so this is also something that one must have in mind when reflecting on this very, very important issue."
Trichet also said the ESRB had not yet made up its mind on how to deal with financial instruments such as derivatives, which have grown fast, but added the matter would be discussed in the ESRB's next meeting. "The fact that it calls for a very, very attentive understanding is absolutely obvious, but. I will have a rendezvous next time."