REPEAT: MNI: CenBanks To Cope With Normalization - Papadia

Repeats Story Initially Transmitted at 07:05 GMT Apr 16/03:05 EST Apr 16

By Silvia Marchetti

     BRUSSELS (MNI) - Central banks will cope with any post-crisis normalization

challenges they face as they revert to more conventional monetary policy, a

former senior European Central Bank figure told MNI in an exclusive interview.

     Francesco Papadia, ECB's Director General for Market Operations until 2012,

told MNI the financial crisis "forced central banks to adopt unconventional

tools and do unexpected things. And the recourse to such tools pushed central

banks to the limits of their powers".

     Papadia, currently chair of the Hellenic Financial Stability Fund (HFSF)

selection panel and of the Prime Collateralized Securities (PCS) board, said

that central bank's would now need to find a way back to only using conventional

policy measures.

     "Today we face a conundrum: is it possible to revert to a model where

central banks only do conventional things without jeopardizing their pursuit of

price stability?" 

     In his recent book 'Central Banking in Turbulent Times', co-written with

Tuomas Valimaki, head of monetary policy and research at the Bank of Finland,

Papadia argues that the normalisation process will not be a smooth one.

     "An excessive amount of responsibility has been put on the shoulders of

central banks. Today in order to return to a pre-crisis, yet performing, model a

few adjustments need be put in place. A big, radical overhaul of the central

banks systems would be, instead, hazardous," said Papadia, who also held various

positions at the Bank of Italy and has been an economic adviser to the European

Commission.

     --FURTHER AMMUNITION

     Policy ammunition is still available to central banks but it needed be used

with caution, he warned. Papadia dismissed as "sterile" the ongoing debate over

whether the ECB will go from being able to do whatever it takes, to being

helpless and inactive.

     "Central banks do not face a period of impotence. There are still

instruments that the ECB, along with most other central banks, can adopt, but it

would be better not to push them to adopt such instruments," he said.

     Asset purchase programs, which have been put in place not just by the ECB

but on a global scale by many major central banks including the Federal Reserve,

Bank of Japan and the Bank of England, have ended up shifting competences

between governments and central banks.

     "The QE adopted by most central banks has been a necessary tool but it has

put them under stress, blurring the boundary between monetary policy and fiscal

policy, and thus triggering a confusion of responsibilities," said Papadia.

     Even though QE's ultimate goal is not to help governments finance their

public debt and maintaining adequate sustainability levels, he noted, at the end

of day the asset purchase program has an impact on finance ministry policies.

     --UNWIND PROCESS 'DELICATE'

     The ECB's normalisation process, as it faces an unwind of its extraordinary

measures put in place to weather the financial crisis, is therefore expected to

be a critical phase of utmost delicacy, warned Papadia.

     In his view, the end of the ECB's QE era and subsequent rate hike is bound

to have repercussions on debt-exposed countries such as Italy, which have

benefitted from massive central bank asset purchases and will thus lack a

parachute as they revert to a sensitivity to debt cost variations.

     In the U.S., Papadia sees an excessively accommodative fiscal policy by the

federal government that he deems unnecessary given the ongoing economic growth

and which is set to put the Federal Reserve under pressure.

     If the Fed decides to raise rates in the short run, it is most likely to

clash with the US administration triggering possible tensions, Papadia

explained.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com