Bank of England's Mervyn King defends ECB over Italian debt decision

Bank of England governor Sir Mervyn King has defended the European Central Bank's refusal to mount a full-scale rescue of Italy saying it was the responsibility of eurozone governments to orchestrate a bailout for ailing member states. King said calls for the ECB to buy hundreds of billions of euros worth of Italian debt misunderstood the role of the central bank, which has an unlimited capacity to print money, but only meagre resources to cope with losses on its investments. Without a single government behind the central bank, as in Britain and the US, a central bank would be unable to invest in countries that could go bust. King said: "[Being a lender of last resort] is a million miles away from the ECB buying sovereign debt of national countries, which is used and seen as a mechanism for financing the current account deficits of those countries, which inevitably, if things go wrong, will create liabilities for the surplus countries. "In other words, it will be a mechanism of transfers from the surplus to the deficit countries. And that is why the European Central Bank feels, I think, and with total justification, that it's not the job of a central bank to do something that a government could perfectly well do itself." King's intervention in the discussion over how to resolve the solvency crisis in the eurozone is unlikely to win friends in the French finance ministry, which has argued for an expansion of the ECB's role in buying Italian bonds to stem the crisis. Valérie Pécresse, the French government's spokeswoman, said after a cabinet meeting in Paris: "The ECB's role is to ensure the stability of the euro, but also the financial stability of Europe. We trust that the ECB will take the necessary measures to ensure financial stability in Europe." Angela Merkel, the German chancellor, made clear Berlin would resist pressure for the central bank to take a bigger role in resolving the debt crisis, saying EU rules prohibited such action. "The way we see the treaties, the ECB doesn't have the possibility of solving these problems," she said after talks with Enda Kenny, the Irish prime minister, who is visting Germany. While her comments appeared to chime with King's, he went on to say the only way for countries such as Italy, Greece and Portugal to regain their competitiveness and convince private investors they can pay off their debts is for creditor nations to write off more of their investments. Germany ranks as one of the largest lenders to weaker peripheral nations after a lending spree over the last 10 years. A writedown of Italian debt along the same lines as the recently proposed 50% cut in Greek debt, would cripple several German banks along with many of the largest institutions in France, Belgium and Austria. Wolfgang Schäuble, the German finance minister, has blocked all attempts to use German taxpayer funds to write off Italian debts. He has insisted the route to recovery for indebted nations is to cut welfare spending and raise taxes and introduce labour market reforms to increase productivity. King argued it would take a transfer of funds from richer nations to poorer ones before the eurozone could establish sustainable growth. "Ultimately it is a question of real resources. Central banks don't have real resources; they create money. "To the extent that governments feel that they have to take the burden of transferring real resources from one country to another in order to sustain a current account deficit for a period, that is a decision that can be taken only by governments."