Europe faces 'true' financial crisis: Bank of France

30th November 2011, Comments 1 comment

Europe is facing a "true" financial crisis with global implications but confidence in the euro as a single currency remains strong, the head of France's central bank said Wednesday.

"We are now looking at a true financial crisis -- that is broad-based disruption in financial markets," Bank of France governor Christian Noyer told a forum in Singapore. "We are facing a financial crisis, not a monetary one."

Noyer, a member of the European Central Bank governing council, said that while most observers trace the turmoil to "fiscal imbalances in peripheral economies," they may have been only the trigger.

Noyer insisted that the euro was not under threat.

"Confidence in the currency remains as strong as ever," he said, adding that exchange rates are high by historical standards and that gross capital inflows into the eurozone remain unaffected by the turmoil.

Noyer acknowledged however that the situation in Europe and the world "has significantly worsened over the past few weeks" and called for a stabilisation of bond markets used by debt-strapped eurozone countries to raise funds.

"Market stress has intensified. Bond markets in the euro area are not functioning normally... It is essential to stabilise European bond markets," he said.

"We have to recognise that the necessary degree of fiscal adjustment is heavily dependent on the level of market confidence."

His comments come as the European crisis is threatening to spread to France, which has seen its cost of borrowing soar due to concerns over Paris's exposure to sovereign debt.

And Noyer warned that any financial contagion in Europe could rapidly spread globally.

European banks have been hoarding cash due to fear of exposure to eurozone debt, further straining the financial system.

"Asia may be 6,000 miles (9,600 kilometres) away from Europe but for the financial markets the distance is less than 30 seconds," Noyer said.

There are fears that the two-year old eurozone debt crisis that has ravaged Greece and now threatens Italy could break up the monetary union and plunge the world into another recession.

Italy has debt of nearly 2.0 trillion euros ($2.6 trillion) and must repay about 400 billion euros next year -- about the same amount the European Union and International Monetary Fund have offered for bailouts of Greece, Ireland and Portugal.

"Economies outside the euro area are feeling the effects of increased uncertainty, lower growth prospects and capital repatriation," Noyer said.

"Europe's fragility comes from its difficulty to organise and manage, in times of crisis, their complex interactions occurring at the heart of its financial system," he said.

"There have been lags in the decision-making process. Fiscal discipline has not been respected in the past. European rules have not been implemented (and) some policy decisions have produced unintended consequences."

© 2011 AFP

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