A top European Central Bank policymaker has intensified warnings of a “full-blown sovereign debt crisis” unless governments take ambitious steps to bring public finances under control, saying the UK, US and Japan faced an even greater challenge than the eurozone.

The comments by Jürgen Stark, ECB executive board member – which echoed similar warnings by the International Monetary Fund– highlighted the spreading concerns sparked by the escalating crisis over Greece’s public debt. However, he played down the idea of the ECB offering Greece a lifeline in an extreme scenario by buying its government bonds.

Speaking at a conference in Berlin, Mr Stark said fiscal concerns had become a “major concern” in the eurozone. But bringing public debt ratios back to safer levels appeared “even harder for the UK, the US and Japan. Given their high budget deficits and the high and rising debt levels, they must undertake very strong consolidation efforts to manage a reversal.”

For the three years from 2009 to 2011, the public sector deficit was expected to exceed 6 per cent of gross domestic product in the eurozone, but more than 10 per cent in the US and UK, he said.

Mr Stark warned that high government deficits would fuel fears about inflation, drive up interest rates and severely limit governments’ room for manoeuvre in future crises. “The onus is now on governments to ensure that the crisis that initially affected the financial sector, and subsequently the real economy, does not lead to a full-blown sovereign debt crisis. Averting it will require very ambitious and credible fiscal consolidation efforts.”

His speech came as Jean-Claude Trichet, ECB president, arrived in Berlin to try to persuade German parliamentarians to back the joint eurozone/IMF rescue programme for Greece. Mr Trichet has urged eurozone politicians to “live up to their responsibilities” and argues that eurozone members share “a common destiny”.

But Mr Stark appeared to rule out one option floated by economists – of the ECB itself buying Greek government bonds. This was not an issued being “discussed at present”, he told journalists in Berlin. In his speech, Mr Stark also pointed out how, even at the height of the post-Lehman Brothers economic crisis, the ECB had not made outright purchases of assets of government bonds – unlike other central banks.

Meanwhile, Mr Stark argued that the eurozone private sector was not facing credit constraints. Instead, the decline in borrowing reflected the weakness of economic activity. The ECB’s latest bank lending survey, released on Wednesday, showed an unexpected weakening in demand for loans by companies in the first three months of this year – showing that a recovery in lending that started early in 2009 had gone into reverse. The results could add to worries about the fragility of the eurozone’s economic recovery.


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