European authorities need urgently to increase the size of resources available to indebted European countries faced with liquidity problems if they want to avert disaster, Willem Buiter, Chief Economist at Citi told CNBC on Tuesday.
Investors, increasingly worried over Italy’s high level of public debt and contagion from Greece, have been pushing shares in the country’s banks sharply lower and borrowing costs significantly higher.
“The European authorities deny there is a solvency problem and they are incapable of handling the liquidity problem faced by Italy and Spain,” Buiter said.
“The financial facilities at their disposal are wholly inadequate to handle Spain or Italy separately, let alone together,” he added.
Buiter called for an end to “denial and impotence in Brussels”, where euro zone finance ministers met on Monday evening to discuss the deepening crisis.
“We have the sovereign debt crisis and the banking crisis moving from the narrow periphery – Greece, Ireland and Portugal – to the broad periphery, including Spain and Italy and even France being touched now,” Buiter said.
“We need an immediate increase in the size of the resources available and in the short term only one entity can provide that: the European Central Bank, which has to re-open the SMP (Securities Market Program) program and stand ready to purchase Italian and indeed Spanish debt outright to keep rates at levels that are consistent with sovereign solvency,” he added.
He warned that ministers needed to act swiftly and certainly before Thursday when Italy plans to raise funds in a debt auction.
“The way things are going they would have a failed auction,” Buiter said.
“We need to restructure the debt of the insolvent government, writing it down in a severe way…and we need to make open-ended and uncapped liquidity available in the first instance through the ECB and ultimately through a much-enlarged EFSF (European Financial Stability Fund) to those countries like Italy that while they need to do additional fiscal and structural work are fundamentally solvent,” he said.
“Unless we do that we have a distaster on our hands and European authorities had better wake up to this,” he added.