Constancio Urges European Fund for the recovery of "flexibility" as ECB pressure Leaders

European Central Bank Vice President Vitor Constancio said European governments should be prepared to increase the size and flexibility of its rescue fund like the ECB urges leaders to do more to fight the fiscal crisis.

Asked whether the fund could be used to purchase government bonds, Constancio said in an interview that "more flexibility in the euro zone resources would be helpful." Constancio, who spoke on Television late yesterday, refused to speculate whether the rest of the ECB Governing Council would support this measure.

ECB officials are pressuring governments to intensify their response to market turmoil that forced last month to Ireland to seek a ransom. While the ECB has bought government bonds to help stabilize markets, the policy has been criticized by Germany's Axel Weber, who says that threatens the independence of the ECB. Weber said last month that governments could increase the size of the bailout fund and Constancio said the measure could be "useful."

Constancio, ECB chief executive after President Jean-Claude Trichet was speaking after presenting the semi-annual Financial Stability Report. The central bank said a "small" number of banks rely heavily on their emergency liquidity funds and the "global economic and financial system is still full of risks."

Officials are debating its next step following the rescue of Ireland does not end the fears of contagion across markets in the euro area bonds. Attention turns to the financial rescue group formed in May, after the Greek crisis threatened to destroy the euro. European Union governments have committed themselves to € 440,000,000,000 (582 billion U.S. dollars) to a European Financial Stability Fund.

ECB pressure

While the use of EFSF could take some pressure off the ECB, the measure could be fraught with legal issues and the funds should be raised before they could be spent, said Carsten Brzeski at ING Groep NV.

Constancio's comments "clearly show that the ECB does not want to be the only savior of the euro area," says Brzeski, economist at ING Groep in Brussels. But "at this time, the EFSF could not do because he has no money. Even if governments decide to cash it will be difficult legally for the principle of non-rescue."

The Maastricht Treaty stipulates that governments can not directly take the debt of other nations.

investor concern over excessive deficits in some countries in the euro zone this year led a rout in the bond market forced Ireland and Greece to find international bailout to refinance its debt. Hindering the access of some banks to finance in the financial markets, forcing to rely increasingly on the ECB.

Too dependent?

"A small number of institutions" are "too dependent on central bank liquidity" and represent "a substantial part of the global refinancing volume," the ECB said yesterday in his report. "The main source of concern stems from the interaction of sovereign debt problems and vulnerabilities in the segments of the banking sector in the euro zone."

The central bank has not provided new data on the losses faced by banks in the coming years and did not name the institutions it sees as too dependent on their funds.

The ECB also urged the Government to take "swift and decisive action" to disable the risks created by a "limited" number of financial institutions.

"It is necessary that the responsible authorities in the form of restructuring, de-risk and, where appropriate, reducing the balance sheets of those companies," the ECB said.

financing euro-region governments "need" will remain important and there is a risk of increased competition for funding, "the ECB said in its report." Any additional request to support troubled banks may further exacerbate the risk of adverse comments from the financial sector and public finances. "