By Todd Buell and Brian Blackstone
FRANKFURT--The European Central Bank upped the pressure on
Greece Thursday, suggesting that if the country didn't reach a deal
with its creditors quickly, it risked worsening conditions under
which some of its other embattled eurozone partners can borrow.
"Financial market reactions to the developments in Greece have
been muted to date, but in the absence of a quick agreement on
structural implementation needs, the risk of an upward adjustment
of the risk premia demanded on vulnerable euro area sovereigns
could materialize," said the ECB in its Financial Stability
Review.
"Default risk expectations have increased sharply in Greece amid
heightened political uncertainty," the report said.
The struggling Mediterranean state is currently in protracted
negotiations with its eurozone creditors over the future of its
bailout deal. While recently, Greek leaders have said that an
agreement is near, other eurozone leaders, such as German Finance
Minister Wolfgang Schäuble, have shed doubt on such claims.
"We always hear positive news coming out of Greece, which is
good. However, we haven't gotten much further in substance in the
negotiations between the three institutions and the Greek
government," Mr. Schaeuble said on German public broadcaster ARD on
Wednesday.
The ECB also said in its twice-yearly report that "the prospect
of an environment of low nominal growth remains the major factor
underlying current challenges for financial stability in the euro
area."
The ECB again stressed the need for structural changes saying
that while monetary policy "can support the conditions for economic
growth," other policies, such as structural reforms "are needed to
underpin sustainable economic growth in the euro area."
ECB Vice President Vitor Constancio told reporters that "the
financial stability situation in Europe has improved," and "one can
say that our policies are working."
In March, the ECB started a broad-based asset-buying program,
known as quantitative easing, where it will buy EUR60 billion
($65.64 billion) a month of mostly government bonds until the end
of Sept. 2016 in an effort to prop up inflation.
Mr. Constancio said he doesn't see evidence of generalized
overvaluation in asset markets, but flagged this as a risk.
"The main risk is the possibility of a reversal of asset
valuations...that would induce capital losses and disturb the
recovery if it would happen."
Mr. Constancio said he was convinced that Greece won't exit the
euro. "It is difficult to build up a narrative where that extreme
case can happen," he said. A country cannot legally be expelled
from the currency bloc, he noted, adding that a rising share of
Greek citizens have said they want to stay in the euro.
Andrea Thomas
contributed to this article.
Write to Todd Buell at todd.buell@wsj.com and Brian Blackstone
at brian.blackstone@wsj.com