Tags: europe | ECB | bank | loans

European Central Bank May End Cheap Loans

Thursday, 03 Dec 2009 08:52 AM

The European Central Bank on Thursday left its main interest rate unchanged at a historical low of 1 percent, as widely predicted by markets, and was expected to announce later in the day that it will start withdrawing some liquidity support measures.

Jean-Claude Trichet, the president of the central bank to the 16 nations that use the euro, will at a press conference provide details on how the bank will start unwinding its extraordinary measures which have given markets extra liquidity during the financial crisis.

Trichet has recently voiced worries that banks may be getting addicted to the central bank's cheap short-term loans -- suggesting he favors a gradual withdrawal of the measures to help the financial sector increase lending again.

Two weeks ago, the ECB announced its first move to wean borrowers from its loans, by tightening the conditions on the type of collateral banks could use to get credit with the central bank.

The ECB said Nov. 20 that asset-backed securities used as collateral would need two credit ratings, rather than just one. The rule, which the ECB deemed necessary to keep high credit standards, will apply to all such securities issued as of March 1, 2010.

At the meeting Thursday, Trichet could confirm that December's one-year money offering will be the last, as well as details of how the ECB will provide liquidity to banks next year. The ECB could also announce plans to phase out other, shorter loan programs.

The outlook for these measures is important because despite the end of the recession, Europe's banks remain reluctant to lend to each other as well as to households and businesses.

Calyon Credit Agricole analysts said Thursday that the ECB's meeting is sandwiched between the fallout from the announcements of Dubai's debt problems last week and the uncertainty of European employment data due Friday.

Trichet's message at the news conference most likely "will be that rates are not about to go up anytime soon, but that the ECB will have to wean the market off the life support of emergency liquidity. If (Trichet) can successfully deliver such clarity, the forex market will happily digest this Trichet sandwich without a problem. The alternatives are potentially not so palatable for the euro."

The euro was trading at $1.5120 after the decision up from the $1.5036 late Wednesday in New York.

The euro has risen in recent months, partly as a result of the ECB's interest rate, which is at a historic low but still higher than the Bank of England's and the U.S. Federal Reserve's.

Higher interest rates can support a currency as investors move funds to where they earn the best returns.

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The European Central Bank on Thursday left its main interest rate unchanged at a historical low of 1 percent, as widely predicted by markets, and was expected to announce later in the day that it will start withdrawing some liquidity support measures.Jean-Claude Trichet,...
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