Tags: ecb | trichet | banks | easing

ECB Chiefs Jawboning Their Way Toward an Exit

Friday, 10 Sep 2010 09:17 AM

European Central Bank President Jean-Claude Trichet said it will take time to wean banks off its emergency lending measures, which policy makers extended last week into 2011.

“We are accompanying the market as it progressively gets back to normal,” Trichet said in an interview with the Financial Times published late yesterday. The ECB confirmed Trichet’s comments. “It’s a process that takes time.”

The ECB last week extended its offerings of unlimited liquidity to banks until at least Jan. 18 as investors refocus their attention on the health of governments’ finances and the banking system. Trichet’s comments were published as ECB colleague Miguel Angel Fernandez Ordonez said another bout of financial instability can’t be ruled out.

“We still can’t completely rule out potential new episodes of international financial instability which prevent the normalization of markets,” Executive Board member Ordonez said in a speech in Madrid. “Banks and savings banks should continue to think about strengthening their financing structure.”

The extra yield that investors ask to hold Irish and Portuguese debt over German bunds this week touched euro-era highs as investors question the cost of bailing out banks and whether governments will push through budget-cutting measures.

The Irish government on Sept. 8 said it will split Anglo Irish Bank Corp. in two as Ireland’s government seeks “finality” on the bailout of the nationalized bank and tries to calm investor concern about the mounting costs.

Phase Out

Trichet said in the FT interview that the unlimited loans to banks are a “transitory” measure and will be “progressively phased” out. ECB Governing Council members Yves Mersch and Ewald Nowotny have said officials won’t decide on a possible withdrawal of the measures until December.

While the central bank wanted to phase them out earlier this year, the region’s fiscal crisis forced a rethink. The yield premiums investors demand to hold Greek 10-year debt rather than German bunds is close to the record reached in May before euro-area governments announced a 750 billion-euro ($954 billion) support package for indebted nations.

The premium on Irish bonds was at 354 basis points yesterday and Portugal’s was at 342 points.

Trichet said the ECB wants a “quantum leap in the reinforcement of fiscal surveillance” of European countries’ budget deficits. He said that a temporary suspension of countries’ voting rights within the bloc is “something that should be explored.”

Spending Cuts

Governments across the euro region are stepping up spending cuts and are raising taxes to tackle budget gaps just as the recovery shows signs of losing momentum. The ECB said in its monthly report yesterday that it expects the economic recovery to continue at a “moderate pace.”

Trichet also said that the stress tests conducted on European banks in July should have been done sooner.

On the risk that the U.S. economy may be sliding back into recession, the ECB president said that “there is a mood which seems to me too negative.”

“That’s my own personal feeling,” he said.

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European Central Bank President Jean-Claude Trichet said it will take time to wean banks off its emergency lending measures, which policy makers extended last week into 2011. We are accompanying the market as it progressively gets back to normal, Trichet said in an...
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2010-17-10
Friday, 10 Sep 2010 09:17 AM
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