Failure of the euro is not an option but the euro zone needs to implement new measures decisively to reassure financial markets, ECB Governing Council member Carlos Costa said on Friday.
An IMF official also urged euro zone policymakers, who this week agreed to impose stricter budget rules on member countries and to bring forward the introduction of a new bailout fund, to find the political will to reduce systemic risk affecting the euro zone.
Costa, speaking at a conference in Lisbon, said that European leaders' response to the risk had been initially slow and hesitant, but in recent months, important steps have been taken in terms of a more balanced monetary union governance model and effective firewalls.
Decisive implementation of new procedures and mechanisms is still necessary to reassure markets on the irreversibility of the euro, Costa, who is also governor of the Bank of Portugal, told a conference on systemic risk in Lisbon. Failure is not an option.
Jose Vinals, financial counsellor and director of the IMF's monetary and capital markets department, said progress had been made at reducing systemic risk, but added that political backing was urgently needed.
I think that the way is clear, but we still need the political will to make it happen. This must be done now, because with the system exposed, we cannot afford accidents to materialize, he said.
Portugal has become a focus of market attention on concerns it may have to follow Greece and require a second bailout, something Portuguese officials have repeatedly denied.
Portuguese banks have been hit hard by the sovereign debt crisis but Costa said they had shown remarkable resilience and would meet solvency targets as demanded by the Bank of Portugal and European authorities.
The country's top listed banks are expected to post record losses for the final quarter of 2011, due to the one-off impact of a transfer of their pension funds to state coffers, exposure to Greece and provisions for bad loans in a recession-hit economy.
Banks are encouraged to find market-based solutions to strengthen their capital positions but, in the event that not all capital needs can be met from private sources, public funds are available from the back-up facility under the (bailout) programme, Costa said.
Under Portugal's 78-billion-euro bailout agreed with the European Union and IMF last year, a 12-billion-euro financing line is available to banks.
Costa urged the banks to continue focusing their deleveraging efforts on selling non-core assets and to keep providing an adequate level of financing to the most productive sectors of the economy.
Finance Minister Vitor Gaspar said Portuguese banks' deleveraging process was well advanced.
The pace and composition of the deleveraging process needs to be consistent with the macroeconomic scenario of the adjustment programme and should not jeopardize the provision of adequate levels of credit to the economy, he added.
Portuguese banks have been frozen out of debt markets due to the sovereign debt crisis and successive credit ratings cuts, but may start bond issues again in 2014, the head of a sector association said.
Antonio de Sousa, president of the Portuguese Banks Association, said if the government could implement measures to fix its public finances and regain credibility, then the country may be able return to the market in late-2013, or at least be able to borrow at longer terms.
There will probably be a time lag between that and the banks being able to return to the markets, so it will be sometime during 2014, de Sousa said.
(Reporting By Sergio Goncalves and Shrikesh Laxmidas, writing by Andrei Khalip; Editing by Susan Fenton)