UPDATE 1-ECB’s Visco warns over reform of euro zone bailout fund

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ROME (Reuters) – European Central Bank Governing Council member Ignazio Visco said on Friday that moves to reform the euro zone’s bailout fund could do more harm than good.

Bank of Italy Governor Ignazio Visco speaks during a meeting in Rome, Italy, October 31, 2017. REUTERS/Remo Casilli

Italy is hostile to proposals to turn the European Stability Mechanism (ESM) into a sort of European Monetary Fund, which would make support for countries in financial crisis conditional on them restructuring their debt.

“This is a matter to be handled with care,” the Bank of Italy governor said in a speech in Rome.

“The small and uncertain benefits of a debt-restructuring mechanism must be weighed against the huge risk that the mere announcement of its introduction may trigger a perverse spiral of expectations of default, which may prove to be self-fulfilling.”

Visco said euro zone countries needed help to reduce their public debts, and to this end “some form of supranational insurance is needed.”

He called for the creation of a European debt redemption fund financed by dedicated resources of the participating countries.

Visco stressed the importance of more expansionary fiscal policies in order to raise inflation in the euro zone and counter its ongoing economic slowdown.

The ECB this month resumed its bond purchasing program known as quantitative easing.

But Visco said governments needed to share more of the burden.

“Acting in isolation, monetary policy can do nothing but continue along the path of ‘non-standard’ measures,” Visco said.

“This increases the risk of adverse side effects, which, in turn, need to be kept under control using instruments of an increasingly administrative nature.”

The Italian central bank chief also called for an acceleration in economic integration, saying the European single currency “needs to interact with a single fiscal policy.”

Reporting by Gavin Jones; Editing by Hugh Lawson

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