Germany's Top Banker: European Debt Crisis Could Last Decade

Thursday, 18 Apr 2013 07:31 AM

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Germany's top central banker warned that the European debt crisis could take a decade to overcome, apparently contradicting claims from other top European officials that the worst has passed.

He also predicted that the European Central Bank (ECB) might cut interest rates depending on future economic developments.

"Overcoming the crisis and its effects will remain a challenge over the next decade," Bundesbank President Jens Weidmann told The Wall Street Journal.

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

"The calm that we are currently seeing might be treacherous" if reforms are delayed, he said.

"Everyone is asking what more can the central bank do instead of asking what other policymakers can contribute," Weidmann noted, adding that the central bank could cut interest rates if new information warranted such a move.

"We might adjust in response to new information," however, "I don't think that the monetary-policy stance is the key issue." The ECB cut its key interest rate to a recod low  0.75 percent in July.

European Commission President Jose Manuel Barroso last week claimed that the worst of Europe's crisis has passed. "I believe that the EU has come through the worst of the crisis but the situation is still fragile," he told reporters during a visit to Prague, according to various newswire reports.

Meanwhile, Weidmann said that "a point that I think is important to make — perhaps less for my central bank colleagues than for finance ministers — is that the medication monetary policymakers administer only cures the symptoms and that it comes with side effects and risks."

The International Monetary Fund (IMF) warned Wednesday that eurozone companies face a massive "debt overhang" that could extend the downturn and possibly spark a more serious crisis, The Washington Post reported.

The IMF stated that as much as 20 percent of the corporate bonds and loans issued by major European corporations are "unsustainable" and will force the firms to default or cut back by chopping capital spending, eliminating shareholder dividends or taking other steps to conserve cash to make debt payments, according to The Post.

Other experts also have continued to urge caution about Europe. Economist Nouriel Roubini, in an article for Project Syndicate, wrote that the eurozone is showing signs of breaking down.

Although the ECB reduced the risk of a euro breakup with its commitment to backstop sovereign debt last summer, the European Union's fundamental problems have not been solved, said Roubini, a professor at New York University and chairman of Roubini Global Economics.

"Moreover, the grand bargain between the eurozone core, the ECB and the periphery — painful austerity and reforms in exchange for large-scale financial support — is now breaking down," Roubini warned, "as austerity fatigue in the eurozone periphery runs up against bailout fatigue in core countries like Germany and the Netherlands."

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

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