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10-07-2012 11:50:00

ECB Noyer: Ready to Act, but Conditions Not Right for SMP

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By William Horobin

PARIS--Bank of France governor and European Central Bank policy maker Christian Noyer said Tuesday that while the central bank remains ready to act within its mandate, the conditions aren't right to reignite its sovereign debt buying scheme.

"The eurosystem stands ready to act, within the framework of its mandate and competencies," Mr. Noyer said in a letter to French President Francois Hollande, accompanying the Bank of France's annual report. "But, in the current circumstances, the effectiveness of its action greatly depends on the decisions concerning the future of the euro area, its governance and its functioning as well as their actual implementation," he said.

In a speech at the Bank of France in Paris, Mr. Noyer explained that the Securities Markets Program--under which the ECB bought around 214 billion euros ($263 billion) of government debt on and off over two years--hasn't been considered as appropriate by the ECB since the beginning of the year and it is now a question of restoring investor confidence. That confidence should be restored with fiscal consolidation and the full implementation of stability mechanisms, such as the European Stability Mechanism that was recently given the green light to buy government debt on markets.

Mr. Noyer also argued that the SMP helped to alleviate short-term financial tensions but it is only governments that can deliver long-term remedies.

Mr. Noyer said that the ECB's decision to cut its refinancing rate and deposit rates by 25 basis points to 0.75% and 0% respectively was, in reality, a "massive operation," because of the trickle down effect it will have on rates through banks. By cutting the deposit rate, the ECB hopes it will discourage banks from depositing at the ECB and will help revive the interbank market, even though it will take time to have an effect.

In Mr. Noyer's letter and speech, he said it is important for the French government to continue consolidating public finances to maintain confidence and boost growth. The French economy also needs to be much more flexible and changes to labor laws are particularly important in this regard, he said.

Write to William Horobin at william.horobin@dowjones.com

(END) Dow Jones Newswires

July 10, 2012 05:50 ET (09:50 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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