'Situation in Europe has significantly worsened'

Posted at 11/30/11 2:54 PM

SINGAPORE - European Central Bank governing council member Christian Noyer said on Wednesday Europe's debt crisis had significantly worsened, threatening global financial markets, but was confident the euro area would emerge stronger and more cohesive.

"The situation in Europe and the world has significantly worsened over the past few weeks," Noyer said at a conference in Singapore. "Market stress has intensified."

"We are now looking at a true financial crisis -- that is a broad-based disruption in financial markets."

Italy's borrowing costs hit a euro lifetime high of nearly 8 percent on Tuesday, heaping more pressure on fractious euro zone leaders to staunch a two-year-old debt crisis that is threatening to splinter the euro zone bloc and push the world economy into a recession.

"In a period of intense market disruption, it is essential to ensure that the monetary policy transmission mechanism actually works. This may involve temporary and exceptional interventions on those market segments where dysfunctions are most apparent," Noyer said.

He did not elaborate on the remarks.

Sources told Reuters last week that the ECB was looking at extending the term of loans it offers banks to two or even three years to try to prevent the euro zone crisis from sparking a global credit squeeze that will choke the world economy.

"The essential weakness of Europe does not primarily lie in the fragility of any of its components," Noyer said. "Europe's fragility comes from its difficulty to organise and manage in times of crisis the complex interactions occurring at the heart of its financial system."

"It is essential to stabilise European bond markets. We have to recognise that the necessary degree of fiscal adjustment is heavily dependent on the level of market confidence."

European banks have been hoarding cash instead of lending for fear of one another's exposure to euro zone debt, adding to strains in the financial system. The cost for European banks to swap euros into dollars is edging closer to levels last seen at the height of the global financial crisis in 2008.

Policymakers and economists have floated a few possible solutions for Europe's woes, including the issue of bonds backed by all members of the euro zone to help the weaker economies, increase sovereign debt purchases by the ECB and boost the size of a bailout fund for the region.

But opposition from Germany and other hardliners in the ECB to some of these proposals has prevented the bank from taking decisive action.

Noyer said earlier this week that he opposed expanding the ECB's government debt purchases so as to preserve price stability and protect the value of the euro over the long term.

He said on Wednesday there were now more downside risks to price stability.

"We should try and delink bank and sovereign risk," Noyer said. "In the future, this may call for more structural solutions, with deposit insurance and crisis resolution mechanisms firmly established at the euro area level."