Financial markets are exaggerating the risks to the euro zone, which is on an economic recovery path, and to the single currency, European Central Bank policymakers said on Friday.

The really irresponsible behavior of credit rating agencies was compounding the problem, Executive Board member Juergen Stark said in a Reuters Insider Television panel discussion as he defended the ECB's controversial decision to buy government bonds.

Markets are, clearly in the current circumstances overshooting, we do not deny that we have severe problems in the euro zone but they are less severe than market reaction suggests, he said.

Other ECB policymakers also came to the defense of the euro in appearances across Europe, where 16 countries share the common currency that came into being in January 1999.

The euro is poised to end the week 1.5 percent higher against the dollar, which would be its best weekly performance this year. But it has shed nearly 16 percent this year against major trading currencies, driven lower by fiscal worries.

People have to understand that the euro is (here) to stay, Mario Draghi, head of Italy's central bank and a member of the ECB's rate-setting Governing Council, said in Helsinki.

In Venice, the ECB's Lorenzo Bini Smaghi said any defection from the euro would be highly detrimental for all concerned.

With the focus on the debt crisis that spilled out of Greece to rattle investor confidence in the broader currency area, the financial markets risked ignoring the fact that recovery was in train even if it remained modest, another ECB board member said.

The growth outlook (in the euro zone) shows a much better performance but recovery is still not very strong, Gertrude Tumpel-Gugerell told reporters during a visit to Warsaw.

In Frankfurt, Stark said it was crazy to question whether the euro had a future and said there was no alternative to the single currency for Europeans.

It is not a crisis of the euro, it is a crisis of sovereign debt. And this crisis is not limited to the euro, he said.

What in my view market participants do not consider in the current circumstances is the fact that economic fundamentals -- before the crisis but also during the crisis and very likely, I am certain, after the crisis -- will remain strong, he said.


Credit rating agencies, already under fire for giving high grades to products that ended up fuelling the first phase of the global financial crisis, were not helping by downgrading countries even as they announced deep budget cuts, Stark said.

(Ratings agencies) follow the market, they act in pro-cyclical way and this is not helpful, he said, backing calls for a separate European ratings agency.

To go a step further, there could be vested interests. What we really need is an independent view of the situation and how to assess the situation.

Standard and Poor's downgrade of Greece to 'junk' status even while authorities were working on a bailout plan particularly irritated policymakers, and Stark said the ECB did not take ratings as gospel.

Asked if the ECB had hurt its credibility by buying lower-quality bonds, he said: Government bonds of lower quality only to the rating agencies.

The ECB has not said which bonds it has bought, but Stark's comments are in line with media reports that most of the 40.5 billion in purchases settled by last Friday are Greek.

Investors are now worried that banks may get into trouble because of heavy investment in the bonds of Greece and other weaker euro zone economies that are burdened with bloated debts.

Nout Wellink, head of the Dutch central bank as well as a member of the ECB Governing Council, said Europe should have stepped in to help Greece earlier, and that Athens should have been called to account earlier too.

There should have been peer pressure on Greece years ago ... The whole country lived beyond its means and the public sector lived beyond its means, Wellink said.

Policymakers also backed the ECB's decision to offer banks extra unlimited funds over three months, denying that it would fan bank dependency on central bank cash.

No, this is not linked. These measures are to make the money market work better, Bini Smaghi said in Venice.

(Additional reporting by Boris Groendahl in Vienna, Brett Young in Helsinki, Dagmara Leszkowicz in Warsaw and Danilo Massimo in Venice; Writing by Brian Love and Krista Hughes, editing by Mike Peacock)