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Greece, Spain must sort out imbalances: ECB

Two major rating agencies, Fitch and Standard and Poor’s, cut their credit rating of Greek government debt this month as its deficit estimates for this year have ballooned to 12.7 percent of gross domestic product.

Earlier this month, S&P revised its credit outlook on Spain to negative and warned that the country risked a debt downgrade in two years if the government did not take tough action.

‘Neither of the two countries is at acute risk of becoming uncreditworthy,’ Nowotny told Austrian magazine Profil in remarks released on Saturday.

‘Nevertheless the trade deficits are substantial and the budget deficits considerably greater than the guidelines set out in the stability and growth pact, which must be adhered to. Those that are in the (eurozone) club must keep to the rules.’

While Spain’s fiscal deficit is expected at roughly 10 percent of gross domestic product this year, its public debt should only hit 67 percent of gross domestic product next year, according to S&P.

Greece’s debt ratio is forecast to hit 120 percent or higher.

Nowotny said the ECB was pushing for institutional reform in the case of Greece and putting pressure on it to make its statistics office more independent.

But he said statistics only provided a warning bell and that Greece must sort out the economic problems behind them. He said the markets were already putting pressure on Greece and Spain by driving up the risk premium on bonds.

On the outlook for interest rates, Nowotny said the ECB looked set to hold steady ‘as long as there are no signs of inflation, and it does not look like there are at the moment.

‘Even the mid-term forecasts show only slow growth ahead.’

Nowotny said the idea that all euro zone countries could jointly issue bonds — a so-called eurobond — had many advantages. ‘But the their use in individual states is another question,’ he said.