By Sean Carney (Dow Jones Newswires 15.6.2012)
Bailouts of profligate euro-zone members are no cure for their government's over-stretched budgets and unless debt piles are slashed, the European single currency remains in danger, the vice governor of the Czech central bank said Thursday.
"Without a substantial debt reduction it is impossible for some countries to start over," Mojmir Hampl said in an interview with Dow Jones Newswires. Only after heavily indebted governments and their creditors agree to write off some or all sovereign debt can they start discussing whether this step would be easier within or outside the currency union, he said.
Mr. Hampl said disinflationary pressures are mounting in the domestic economy but stopped short of backing an interest rate cut this month.
The Czech Republic is outside the euro area where four member states -- Spain, Portugal, Ireland and Greece -- have sought international bailouts and is one of the most fiscally conservative countries in the 27-member European Union. The country has a low debt load compared with the majority of other EU states.
Mr. Hampl has opposed hurried Czech adoption of the euro and Friday said he staunchly opposes the European Commission's recently-proposed banking resolution and recovery plan, that is part of a broader banking union proposal that aims to unify European banking rules across the continent while spreading risk beyond individual countries into the broader European Union.
As proposed, the resolution and recovery plan is a "half-baked idea," he said.
It would remove existing safeguards to Czech financial stability, such as the central bank's current ability to prevent foreign banks from draining liquidity from local subsidiaries, while enabling the rapid spillover of financial problems from troubled countries to healthier nations, he said.
One risk facing the Czech and regional economies is if Greek election results Sunday give power to parties opposed to meeting tough budgetary conditions attached to the country's bailout and unsettle markets. If markets react negatively after the Greek poll, the Czech central bank is prepared to step up and defend the country's currency, the koruna, Mr. Hampl said.
"Should the situation deteriorate really substantially, I think the Czech national bank might use various tools within its instrumentaria to cope with unexpected events," he said, adding that the central bank has a "broad range of tools that can be used under unexpected circumstances."
Mr. Hampl did not specify how the bank could act.
Despite the koruna weakening slightly Friday to major global currencies and after losing 4% to the euro since mid-March, Czech assets should remain a good store of value, he said.
"Fundamentally the economy is healthy, I've got no doubt about that. The financial sector of the economy is healthy, which is very important in the current circumstances," Mr. Hampl said.
Czech assets, including the country's bonds, are deemed by some economists as regional safe-haven investments and Mr. Hampl said he couldn't dispute this view.
Speaking on domestic interest rates, Mr. Hampl said he wouldn't rule out voting for a cut to interest rates at the central bank's policy meeting on June 28.
After the preliminary figures of GDP in May, he said he could hardly imagine any moves but down, yet Friday he said markets had misinterpreted that statement as a firm commitment to vote for lower rates at the next meeting.
"I cannot tell you right now how I'm going to vote, but definitely, definitely, there is an accumulation of anti-inflationary risks. There's no doubt about that for me."
"Whether it is enough for a further cut at the current juncture, at the next meeting, I'm not 100% sure," he said.
The central bank's key interest rate has been at the historic low of 0.75% since May 2010.