ECB’s Mersch: euro will survive, warns on low rates

The risk of leaving interest rates too low has grown, European Central Bank policymaker Yves Mersch said on Wednesday, adding that the euro would survive the current crisis engulfing Ireland, Greece and Portugal.
"The euro will certainly survive the crisis, on that there is no doubt," Mersch said in an interview with German newspaper Die Welt to be published on Thursday.
But he hit out at the German-led change in tack by politicians, in the direction of a euro zone default plan.
"What worries me above all is the behaviour of individual countries." Mersch said. "They say again and again they support the euro but at the same time they go in a unilateral direction and have poor communications that unsettle the markets."
Mersch also echoed the view of other top policymakers that only Ireland could trigger the process of receiving EU/IMF aid and urged the euro zone to be flexible in applying any new plan to make bondholders shoulder some of the cost of a default.
"Don't misunderstand me, I'm not fundamentally opposed to the option of involving private creditors," Mersch said.
"But we should take our lead from the experiences of the International Monetary Fund. Nowhere in the statutes of the IMF does it say that it must resort to this option, but — depending on the situation — it has chosen this option."
Asked if he still saw a greater risk in leaving rates low for too long than in raising them swiftly, Mersch said:
"Even more than before … If rates are low for too long, this leads to a higher appetite for risk among investors … These dangers are unavoidable and we will pay the price for them if we do not take them into account."
He also played down the risk that Ireland's problems would spill over to another debt-choked euro zone member, Portugal.
"Portugal has enough arguments to prevent the risk of infection. It has indeed taken less dramatic measures than Ireland, but it was not such a high deficit."
"Also its problems do not stem from a housing bubble financed by the banking sector," Mersch said.
Mersch and another ECB policymaker, Vice-President Vitor Constancio, said it was up to Ireland to decide whether it wanted to apply for EU aid to overcome its problems.
Constancio also said the ECB was not about to change its collateral framework to suit the situation in the hardest-hit countries.
"As you know, we have an established policy of collateral, and banks have to present collateral for access to liquidity," he said. "That policy is well known, it's public and we proceed according to those rules. No changes in that respect have been introduced to change our rulebook."