October 27, 2017 / 12:01 PM / a year ago

UPDATE 1-ECB can and should avoid state defaults in euro zone: Nowotny

(Adds context, Praet)

By Francesco Canepa

FRANKFURT, Oct 27 (Reuters) - The European Central Bank can and should avoid the default of states that form part of the euro zone in order to preserve the unity of the currency bloc, ECB policymaker Ewald Nowotny said on Friday.

His comments raise questions about the prevailing view that the ECB cannot bailout governments. This has been a key factor fuelling market speculation, particularly during the 2010-12 crisis, about debt-laden countries such as Greece falling out of the bloc.

Redenomination to other currencies by a euro zone country “is a kind of risk that the ECB cannot and should not accept,” Nowotny, who is Austria’s central bank governor, said.

“The risk of a sovereign default... is something that the ECB has the power to avoid and should use its power to avoid,” he said, adding this was “part of the mandate”.

ECB President Mario Draghi quashed speculation about a collapse of the euro in 2012 when he pledged to do “whatever it takes” to save the currency.

But any ECB aid is dependent on the recipient state agreeing to conditions with the other members of the euro club.

This proviso was added to avoid falling foul of a rule, enshrined in European treaties, banning the financing of governments with central bank money.

Speaking earlier at the same conference, ECB chief economist Peter Praet said it was very rare for a government to default on its domestic debt if it used its own currency but this was different in the euro zone due to the ban on monetary financing. (Reporting By Francesco Canepa; editing by Balazs Koranyi and Peter Graff)

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