EU's Rehn says not sure euro overvalued now

DAVOS, Switzerland Thu Jan 24, 2013 1:54pm EST

Italy's Prime Minister Mario Monti speaks during the annual meeting of the World Economic Forum (WEF) in Davos January 24, 2013. REUTERS/Pascal Lauener

Italy's Prime Minister Mario Monti speaks during the annual meeting of the World Economic Forum (WEF) in Davos January 24, 2013.

Credit: Reuters/Pascal Lauener

DAVOS, Switzerland (Reuters) - The euro is probably not overvalued now but the European Union is keen to avoid a currency war in which its exchange rate could suffer and set back Europe's economic recovery, the EU's top monetary official said on Thursday.

Economic and Monetary Affairs Commissioner Olli Rehn also said that euro zone countries were working on ways to help Ireland and Portugal regain full financial market access this year and emerge from international bailout program.

In an interview with Reuters Insider television at the World Economic Forum in Davos, he was asked whether he was concerned that action by other major central banks was landing Europe with an overvalued currency that would slow its exit from recession.

"I'm not sure if we have too strong a euro for the moment but certainly we would not want to see a currency war of competitive devaluations which would have a negative effect on the euro," Rehn said.

"It's important that we've had a relatively stable exchange rate thanks to the stability of the euro during this crisis, because while we had a financial crisis and a debt crisis, we didn't need an exchange rate crisis on top of that," he said.

The outgoing chairman of euro zone finance ministers, Jean-Claude Juncker of Luxembourg, said this month the exchange rate, which has gained 10 percent against the dollar since last July and 20 percent against the yen, was "dangerously high".

Rehn said several options were under consideration to help Dublin and Portugal return to the markets, including possibly extending the maturity of bailout loans from the euro zone rescue fund, or providing a new precautionary credit line.

A credit line agreement would provide a basis for the European Central Bank, if it so decided, to buy short-term bonds to support Ireland and Portugal, bringing their borrowing costs down.

No decision had been taken yet and the European Commission would put forward proposals in March on ways to support the two countries exiting EU-IMF bailouts, he said. He added he expected euro zone ministers to take a decision in "spring-winter", a Finnish season that runs roughly from mid-February to mid-April.

Separately, the ECB is considering Irish proposals to relieve the huge burden of servicing promissory notes issued to rescue failed Anglo Irish Bank in 2008, which costs an annual 3.1 billion euros to the Irish treasury.

Dublin has proposed converting the notes into government bonds that could be tendered as collateral with the ECB to reduce the cost and allow Ireland to access central bank lending, financial sources said.

A decision is expected by late March, when the next annual repayment is due.

Rehn said the mood in Davos about the euro had changed radically from a year ago, when bankers at private meeting were holding straw polls on when the single currency would collapse and when Greece would be forced out.

"Last year there was a very tense mood here in Davos," he said. "This year I think we are seeing sentiment moving from stabilization to recovery, and that means I should get a chance to do some cross-country skiing."

(Writing by Paul Taylor; Editing by Toby Chopra)

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