The European Central Bank cannot intervene much more aggressively to tackle the eurozone debt crisis, three ECB policymakers from the bloc's core said on Thursday, pressing governments to act instead. The ECB is under growing pressure from world leaders to do more to address the crisis which has now engulfed Italy, exacerbated by the prospect of a political vacuum after Prime Minister Silvio Berlusconi's impending departure.
--- Policymakers Knot, Praet, Stark all resist bigger ECB role
--- Knot says more risk ECB assumes, harder it is to sterilise
Dutch central bank President Klaas Knot, a member of the ECB's 23-member policymaking Governing Council, led fresh ECB resistance. "We have gone pretty far in what we can do but there is not much more that can be expected from us," Knot told the Dutch parliament. "It is now up to the governments ... to make sure the doubts about sustainability, about repayment of individual government debt are removed as quickly as possible." A Bundesbank spokesman said separately that there had been no ECB crisis meeting on Wednesday or Thursday.
German government bonds pared earlier losses as hopes that the ECB may ramp up its response to the deepening crisis faded. Knot's comments echoed a warning to European governments from German ECB policymaker Juergen Stark late on Wednesday not to rely on the bank's help.
Italian 10-year bond yields have shot past 7 percent - the point at which Portugal and Ireland were forced seek bailouts - despite ECB buying of the country's debt, making it clear that a bigger response is required. The yields slipped back to just below 7 percent on Thursday but remained in dangerous territory, and with no agreement on how to scale up the eurozone's rescue fund, the ECB is the only plausible defender for now.
A eurozone official said the bloc was not making any plans to bail out Italy, which is deemed too big to save with the 440 billion euro ($600 billion) European Financial Stability Facility. A second said the hope was that the ECB would be forced by the 'gravity' of the situation to act more forcefully. Despite the intensification of the crisis, the ECB has not delivered the kind of 'shock and awe' intervention that could calm markets. The bank is reluctant to take more risk onto its books by buying more bonds from debt-laden eurozone countries.
"The more risk we take on, the more difficult it will be to neutralise the effects from this money creation. Then we land at the quadrant where we would have put on the money printing press," Knot said. To date, the ECB has distinguished itself from the US Federal Reserve and the Bank of England by refraining from embarking on a policy of 'quantitative easing' - code for printing more money.
Instead, the ECB sterilises - or neutralises - its bond buys by conducting weekly liquidity absorbing operations equal to the cumulative size of its debt purchases. "There are countries in Europe who have a less good experience with this. That is why we have included in the Maastricht Treaty that problems cannot be solved in this manner," Knot added. In Germany, the legacy of hyperinflation in the 1920s has left people with a strong aversion to price rises. German policymakers are steadfastly opposed to the ECB engaging in quantitative easing for fear it could be inflationary.