July 10, 2011 / 10:31 AM / 8 years ago

UPDATE 1-Trichet says debt is global, not European problem

* Debt crisis would make second bank bailout impossible

* Calls for creation of EU finance minister in long term

(Recasts, adds details)

By Daniel Flynn and Jean-Baptiste Vey

AIX-EN-PROVENCE, France, July 10 (Reuters) - The tax row in the United States demonstrates that the sovereign debt crisis is not just a European problem but a global one, European Central Bank President Jean Claude Trichet said on Sunday.

Trichet also warned that the fragility of public finances on both sides of the Atlantic would make it impossible for Europe and the United States to bail out their banking sector a second time, making it imperative they get regulation of the sector right this time.

“We now have a crisis of public credit ratings which is not a European crisis, although Europeans are at the epicentre of a problem which is a global problem,” Trichet told a business conference in southern France.

“You just have to follow the debate on the other side of the Atlantic in the United States on tax to understand that we are witnessing a global problem.”

U.S. President Barack Obama will seek on Sunday to salvage high-stakes talks to raise the national debt ceiling by an Aug. 2 deadline, in a bid to avoid Washington’s first-ever default on its financial obligations. Republican lawmakers are strongly opposed to plans for higher taxes as part of a wider deal.

Despite the approval of fresh austerity measures by crisis-stricken Greece this month, fresh fears of contagion in the euro zone swept financial markets this week, hiking the yield spreads on Spanish and Italian bonds.

The risk premium on Italian debt rose to its highest since the launch of the euro zone on Friday amid concerns over the capitalisation of its banks and a spat between Prime Minister Silvio Berlusconi and his finance minister.

“The great discovery of recent years has been the structural fragility of the integrated global economy which we have created,” Trichet said.


Trichet said that, while some progress had been made on regulating banks considered “too big to fail”, progress needed to be made on the shadow banking system, such as hedge funds.

Work needed to be done in curbing pro-cyclical effects in the financial system, which worsen economic downturns, he said.

Earlier this week, Trichet singled out credit ratings agencies as contributing to such pro-cyclical effects, days after Moody’s slashed Portugal’s rating to junk status.

While western countries were able to fall back on solid credit ratings to fund a financial bailout at the height of the financial crisis, they no longer had that option and would have to rely on stricter regulation of banks, Trichet said.

“We are absolutely obliged to succeed because we cannot for a second time stump up on both sides of the Atlantic 27 percent of GDP to prevent the financial sector’s collapse,” he said.

One of the greatest challenges facing developed countries was structural reforms to improve economic growth which was being hampered in some cases, such as Japan and Europe, by poor demographics.

Trichet said that European Union countries needed to take tougher action to restrain their public deficits and should eventually think about creating a single European finance minister.

“Over the long run we could imagine a flexible confederation that would be quite different from the United States but in which we would have for the particular area of economic policy a federal minister and a federal ministry,” Trichet told a business forum in southern France.

“This would be an evolution that as a citizen I wish but which will not be for tomorrow, rather for the day after tomorrow,” he said. (Additional reporting by Marie Maitre and Cyril Altmeyer; Editing by Louise Heavens)

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