Europe's debt crisis has significantly worsened, threatening global markets, so it is essential to stabilise the region's bond markets, European Central Bank governing council member Christian Noyer said on Wednesday.
The ECB will do whatever is necessary to ensure adequate financing is available for companies and households, amid growing signs of funding strains in Europe's banking system and a jump in government bond yields, Noyer said during a visit to Singapore on Tuesday.
The situation in Europe and the world has significantly worsened over the past few weeks, Noyer, who is also French central bank governor, said at a conference.
He was less downbeat about his native France, sceptical of forecasts of recession.
We do not see on the cards reasons for recession, he said. We have probably a weak period at the present moment.
The latest sign of sovereign stress came from Italy on Tuesday, when a jump in its borrowing costs to a euro lifetime high of nearly 8 percent heaped more pressure on fractious euro zone leaders to staunch the debt crisis that is threatening to splinter the group and push the world economy into a recession.
The essential weakness of Europe does not primarily lie in the fragility of any of its components, Noyer said. Europe's fragility comes from its difficulty to organise and manage in times of crisis the complex interactions occurring at the heart of its financial system.
In the latest efforts to tackle the two-year crisis, euro zone finance ministers on Tuesday agreed to ways to boost the financial firepower of the 440 billion euro rescue fund and said they may turn to the International Monetary Fund for help.
Noyer said European bond market stress had intensified and we are now looking at a true financial crisis -- that is a broad-based disruption in financial markets.
That would require ECB intervention, he said.
In a period of intense market disruption, it is essential to ensure that the monetary policy transmission mechanism actually works. This may involve temporary and exceptional interventions on those market segments where dysfunctions are most apparent, Noyer said, without elaborating.
Sources told Reuters last week that the ECB was looking at extending the term of loans it offers banks to two or even three years to try to prevent the crisis from sparking a global credit squeeze that would choke economic activity.
It is essential to stabilise European bond markets. We have to recognise that the necessary degree of fiscal adjustment is heavily dependent on the level of market confidence, Noyer said.
Policymakers and economists have floated a few possible solutions for Europe's woes, including the issue of bonds backed by all members of the euro zone to help the weaker economies, increase sovereign debt purchases by the ECB and boost the size of a bailout fund for the region.
But opposition from Germany and other hardliners in the ECB to some of these proposals has prevented the bank from taking decisive action.
Noyer said earlier this week that 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.
Noyer declined to answer a reporter's question on whether further interest rate cuts were needed, but said he expected euro zone inflation to ease back towards the ECB's target of just below 2 percent in the next few months.
However, Noyer said the crisis meant that downside risks to price stability had increased.
A firm majority of economists polled by Reuters believe the ECB will cut rates again next week and throw more funding lifelines to stressed banks, while European leaders continue to spar over ways to tackle the debt crisis.
The poll also suggested that under its new President Mario Draghi the ECB will act more decisively, perhaps through unconventional means.
The central bank cut interest rates 25 basis points to 1.25 percent earlier this month to boost a euro zone economy that stands on the brink of recession after barely growing in the third quarter.
We should try and delink bank and sovereign risk, Noyer said. In the future, this may call for more structural solutions, with deposit insurance and crisis resolution mechanisms firmly established at the euro area level.
Reuters polls in recent weeks showed that most leading economists and former policymakers believe the euro zone bloc is unlikely to survive the debt crisis in its current form, and gave an even chance that the ECB would have to make a highly controversial break from its existing policy and start printing money to prevent a further escalation of the crisis.
(Editing by Kim Coghill and Neil Fullick)