The European Central Bank (ECB) confirmed yesterday that it must give permission before any euro-zone state can raid its own foreign currency reserves to ease domestic borrowing requirements.
The Minister for Finance, Mr McCreevy attempted to access the foreign currency reserves held by the Central Bank in advance of last year's Budget, but was refused.
It is as yet unclear whether or not the Minister will seek the ECB's approval for such a move this year, but he hinted earlier this week that such an option had not been ruled out. Mr McCreevy has said that the public finances are likely to register a deficit of €750 million for 2002.
The Department of Finance said yesterday that inquiries on the subject of the foreign currency reserves should be addressed to the Central Bank. A Central Bank spokesman said the debate on the reserves had only recently begun and that it was "far too early" to say where they would end up.
The Central Bank currently holds foreign currency reserves worth about €6 billion, much of which some commentators say has been unnecessary since the launch of Economic and Monetary Union.
The ECB is currently in the midst of a review of foreign currency reserves held in central banks across the euro zone that may lead to lower domestic reserve requirements.
The ECB warned yesterday that the use of national foreign currency reserves by euro zone members to pay down debt could affect the stability of the euro and was in breach of European Union rules. "The mere attempt to expropriate the official reserves... can have repercussions for the stability of the single currency," the ECB's spokesman said, adding that such a move contravened the Treaty on European Union. Yesterday's statement came after news that Italian policymakers were eyeing foreign currency reserves as a means of balancing domestic books. Italy has €24.5 billion in gold reserves and about €21 billion in foreign-exchange reserves, compared with a national debt of €1.386 trillion at the end of July.
An Italian parliamentary commission on Thursday proposed an amendment to Italy's 2003 budget which would allow the use of some Bank of Italy reserves to help chip away at the country's debt mountain.
Slowing economic growth is pressuring Rome's budget deficit and the government has been exploring ways of keeping on the right side of budget rules laid out in the European Union's Stability and Growth Pact for prudent public finances.
A Bank of Italy source also said yesterday that the use of foreign exchange reserves would be "against EU treaties".
"Reserves are property of the Bank of Italy," the source said, adding that the proposal contrasted with laws which guarantee the central bank's autonomy and independence.
An ECB spokesman said foreign exchange transactions by euro-zone national central banks and the ECB, collectively known as the Eurosystem, are subject to approval by the ECB.
"Since it is a basic task of the Eurosystem to hold and manage official foreign reserves, such a disposal would have to be approved by the governing council of the ECB," he said.
Earlier this year it was estimated that in the whole Eurosystem, foreign-exchange and gold reserves totalled some €400 billion, of which roughly €350 billion was still in the hands of the 12 euro-zone national central banks. - (Additional reporting Reuters)
