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OECD Sees ECB Action this Week to Tame Markets

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06/17/2012 | 06:56pm EDT

LOS CABOS--The head of the Organisation for Economic Cooperation and Development said Sunday he expects the European Central Bank to announce within the week powerful action to tame growing volatility in euro zone markets.

"It is high time and one of the reasons I have confidence is because we've run out of options," OECD Secretary-General Angel Gurria said in an interview.

"They're probably already doing it, I'm sure they're going to announce that they are already acting," he said, as world leaders convene in the Mexican resort city for a summit of the Group of 20 largest economies Monday and Tuesday.

With the euro zone teetering on the edge of a financial precipice that could send Europe and the global economy into a tailspin, leaders are urgently pushing EU officials for aggressive near-term action and a clear plan for longer-term euro zone financial and fiscal integration.

Greece's elections appear too close to placate market worries that the country may ultimately default or exit the euro zone. Meanwhile, Spain's borrowing costs have continued to hit record highs even after the EU vowed to lend Madrid EUR100 billion to recapitalize its weak banks.

The OECD chief said he expects euro zone officials could outline to the G-20 a rough plan for greater fiscal and financial union.

But he said the ECB needs to "detonate" its own crisis-fighting weapons now.

Mr. Gurria said that while central banks outside the euro area have "done their part" and stand ready to act as necessary if the euro zone crisis accelerates this week, the burden of responsibility lies largely on more aggressive and immediate ECB efforts to show and use its "awesome firepower."

Specifically, he said the ECB should lower key policy rates and buy ailing government bonds with significant strength in secondary markets.

"Lowering key rates....is a signal, it's not that one-quarter point or half a point is going to change the world, but it is going to signal that the big brother is watching in the sense of saying we'll take care of you," Mr. Gurria said.

"But that's not enough, I am talking about acting in the markets, bringing down the yields in particular in Spain and Italy," he said.

Size matters in bond-market intervention, the OECD chief added. It needs to be big enough to show investors that they could "lose your shirt" if they bet against member countries, he said.

Fiscal hawks on the ECB board, particularly from Germany, have so far kept the ECB from moving ahead with the type of action called for by ailing members as well as the International Monetary Fund.

Mr. Gurria said those concerns, while legitimate, need to be set aside for now. ECB governors should act to use "every single instrument, tool, asset and euro" to support countries that built and ultimately own the currency union, he said.

He also made it clear that there might be a need to restructure some euro zone sovereign bonds.

Italy, for example, can by law unilaterally lengthen the maturity on its outstanding government bonds, he said. That could allow Rome to minimize its refinancing needs in the next few years while locking in funding costs from a more benign era, gaining time to push through reforms aimed at improving economic and fiscal performance to make its EUR2 trillion public debt load more evidently sustainable.

"Why might people want to start talking about this? Because such an arrangement would not imply mark-to-market losses for long-term debt holders and could even push the price of the paper up," Mr. Gurria said, marking the first time a high-ranking public official has mentioned the possibility.

Current yields of nearly 7% for Italy and Spain are not just unsustainable but represent a "collision course" between creditors and the public, he said.

"How long is the public ready to stand in to support hedge funds and big foreign banks?" Mr. Gurria asked, noting that was a significant issue when he was Mexico's lead negotiator in talks that led to the so-called Brady bonds that helped U.S. banks and Latin American governments sort out a debt crisis 20 years ago.

"We have enough experience now. We saw a lot of false starts in Greece, where we let too much time pass and lost so much, not just in terms of ultimate debt writedowns but in terms of stock-market and employment losses," Mr. Gurria said. "Even after the private-sector involvement, here we are still quaking in our boots about the result of the Greek election," he said.

"There can be a better combination of the private sector and the public sector," he said. "So let's call a truce. No creditor wants to get in a collision course with Italy or Spain."

To be sure, an outright restructuring, with the intrinsic debate about what constitutes a default, might not be necessary and is unlikely to be imminent, Mr. Gurria said. The critical thing is to make sure countries whose efforts win approval from their currency union partners continue to have access to affordable funding, which could also be delivered via the ECB or other institutional vehicles.

Write to Ian Talley at ian.talley@dowjones.com and Chris Emsden chris.emsden@dowjones.com

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