EU Must Get Real or Risk New Debt Crisis, Says ECB’s Stournaras

(Bloomberg) -- Europe risks a new sovereign-debt crisis if governments don’t match the European Central Bank’s action with a common fiscal response to support the economy through the coronavirus pandemic, according to ECB policy maker Yannis Stournaras.

Stournaras, who heads the Greek central bank, urged leaders to stop bickering and form a “strong alliance” to fight the coronavirus. He particularly recommended jointly issued bonds, a step backed by several nations but resisted by more fiscally conservative ones.

“Now is the time for common action and solidarity,” he told Bloomberg News. “Moral hazard considerations should not be the main determinant of our actions today.”

While European governments have announced national fiscal measures worth hundreds of billions of euros, they’ve struggled to agree on a common approach. German Chancellor Angela Merkel is opposed to so-called corona-bonds, reflecting her country’s concerns about becoming liable for spending by weaker economies.

Italian Prime Minister Giuseppe Conte has pushed back against forcing struggling countries to apply for credit lines from the European Stability Mechanism, the region’s rescue fund.

Common Enemy

Stournaras argued against focusing on the ESM as the primary way to provide relief.

The ESM “has a very serious role to play” but conditional credit lines aren’t an appropriate tool in a pandemic and “cannot be applied to current circumstances,” he said. “Common issuance of debt is common action against the common enemy.”

The ECB plans more than 1 trillion euros ($1.1 trillion) of asset purchases this year along with other support measures to prevent a credit squeeze and fight the economic fallout from the coronavirus.

President Christine Lagarde has also been trying to cajole leaders into agreeing to joint debt.

Bundesbank President Jens Weidmann said in an interview with German newspaper Die Zeit on Wednesday that euro-area governments shouldn’t feel “absolved from responsibility” by the ECB’s decisive response, but that he remains “skeptical” over joint bonds.

While ESM credit lines typically come with tough conditions such as economic reforms, he said the requirements “wouldn’t be as strict” in this case.

Stournaras said sovereign-debt levels are set to increase by 10 to 20 percentage points because of virus-related fiscal spending. In Greece, which triggered the region’s debt crisis a decade ago, the burden already amounts to 180% of GDP, compared with around 60% in Germany.

It’s also likely that the quality of assets on banks’ balance sheets will deteriorate, and soured loans are expected to increase, he added.

“Debt-sustainability issues might surface again when the pandemic is over, which will hamper growth prospects,” Stournaras said. “The ECB has shown flexibility and common spirit. The same spirit, flexibility and realism has to be shown by other European institutions as well.”

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