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Jun 13, 2012, 09.51 AM IST | Source: Reuters

ECB says Spain bailout will help stabilise economy

The Spanish bank bailout will help stabilise the country, the European Central Bank said in a report on Tuesday that also put the onus on euro zone governments to solve the currency bloc's problems.

ECB says Spain bailout will help stabilise economy

The Spanish bank bailout will help stabilise the country, the European Central Bank said in a report on Tuesday that also put the onus on euro zone governments to solve the currency bloc's problems.

In a twice-yearly report, the ECB said there had been a renewed rise in euro zone tensions since April, but that the levels were below where they were at the end of last year.

It laid out three key areas of concern -- dwindling bank profits, excessive deleveraging by banks and, the main risk, the potential for an aggravation of the debt crisis.

"Continued turbulence related to specific markets and countries in the first half of 2012 confirms the remaining fragilities in the financial stability outlook," the ECB said.

"This, in turn, has demonstrated that there is no room for complacency, either on the part of governments or on that of banks," it added, calling for governments to step up efforts to repair their finances and treat suffering banking sectors.

Attending to the latest flare up in the euro zone's debt crisis, euro zone finance ministers agreed on Saturday to lend up to 100 billion euros to help recapitalise Spanish banks.

"What has been decided has certainly contributed to stabilising the situation in Spain," said Vitor Constancio, vice president of the ECB, who presented the ECB bi-annual Financial Stability Review. "The market is digesting what is happening."

The ECB suggested installing a banking union to make the euro zone more resilient. The banking union would include a cross-border deposit guarantee scheme, a crisis resolution fund to wind up failed banks as well as new bank supervisory body.

While the ECB calmed markets at the beginning of the year by injecting more than 1 trillion euros into the banking system with its twin 3-year loan operations - also called LTROs - it stressed that such steps could not replace political reforms.

"The three-year LTROs were never meant to be a substitute for other forms of policy action," the ECB said. "Exceptional and temporary non-standard central bank monetary policy measures have created breathing space that must be used wisely and effectively."

ECB President Mario Draghi has urged politicians to come up with long-term vision for euro zone, sparking a more serious debate about a closer fiscal and political integration in the euro zone and EU leaders now aim to agree to develop a road map to "fiscal union" at a June 28-29 EU summit.

READ MORE ON  ECB, Spain, euro, Mario Draghi

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