Italy's economy is fundamentally sound and should be able to win back market confidence if it shows fiscal discipline, European Central Bank member Christian Noyer said on Monday, ruling out a collapse of the euro zone because of the sovereign debt crisis.
Noyer, also Bank of France governor, said he could not comment on reports that Italy was talking to the International Monetary Fund about possible support if investors continue to push up its borrowing costs.
The euro, under selling pressure for weeks, rose on Monday on reports that debt-strapped Italy could turn to the IMF as a lack of consensus hampers Europe's response to its debt problems which threaten to undermine the global economy.
Italy should not be considered a weak economy, Noyer told reporters in Tokyo.
A breakup of the euro zone is out of the question. There is no plan B.
Though Italy's debt levels are relatively high, it runs a primary budget surplus and has a strong industrial base, Noyer said. A primary budget balance excludes debt servicing costs and income from bond sales.
One source with knowledge of the matter said contacts between the IMF and Italy had intensified in recent days as concern grows that German opposition to an expanded role for the ECB could leave Italy without a financial backstop.
The source said it was unclear what form of support the IMF might offer, such as a traditional standby arrangement or a precautionary credit line, if a market selloff on Monday forced immediate action.
Policymakers and economists have floated a few possible solutions for Europe's woes, which include common bonds for the euro zone, increased sovereign debt purchases by the ECB and increasing the size of a bailout fund for the region.
Opposition from Germany and other hardliners in the ECB to some of these proposals has fueled speculation that a crisis sparked by Greece's high public debt will spread through Europe largely unchecked.
Noyer said 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.
I believe that virtue will eventually be rewarded, Noyer said earlier in a speech.
In the next decade, markets and lenders will trust those currencies that, whatever the circumstances, are managed with one overriding priority: preserving price stability and the intrinsic value of the currency unit.
It is up to European governments to provide a lasting backstop for liquidity, Noyer added.
French banks do not face significant problems with funding, so there is no need for the government to re-enact emergency lending facilities used in 2008 at the height of the U.S. subprime loan crisis, he said.
He termed unreasonable recent gains in French government bond yields and declines in French bank shares, saying France's fiscal position is stronger than that of many other countries.
Yields are low now in countries whose central banks purchase government debt, but this could become unstable if the inflation environment changes, Noyer said.
A rise in sovereign yield spreads and a loss of confidence in Europe shows there are downside risks to price stability, he said.
Noyer said marking banks' sovereign debt holdings to market prices has unintentionally created more problems as banks felt they would be penalized in the future for holding such debt.
Involving private-sector investors in restructuring Greek debt also shows that sovereign debt is no longer risk free, he said.
(Reporting by Stanley White; Editing by Tomasz Janowski and Jonathan Thatcher)