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Jean-Claude Trichet fears consequences of crisis

Latest update : 2008-03-26

European Central Bank (ECB) chief Jean-Claude Trichet told European Union lawmakers in Brussels he "wouldn't say the worst is behind us", and gave the authority's priority as the struggle against inflation.

LONDON, March 26 (Reuters) - Top central bankers warned on
Wednesday there was no end in sight to the global credit crunch
as German banking giant Deutsche said the crisis threatened its
profit target for this year.
European Central Bank President Jean-Claude Trichet said the
turbulence that has gripped financial markets since last summer
would probably endure until the U.S. housing market perked up.

"Until conditions in the U.S. housing markets show signs of
improvements, the possibility of continuing tensions in
structured credit markets cannot be excluded," Trichet told a
European Parliament committee.

"Large euro area banks are likely to face pressure on their
revenues on account of lower activity levels in the structured
credit markets as well as from a general retrenchment from
risk-taking across business lines," he said.

U.S. Treasury Secretary Henry Paulson said housing prices
needed to be allowed to continue to drop for now.

"The sooner we work through it, with a minimum of disorder,
the sooner we will see home values stabilise, more buyers return
to the housing market, and housing will again contribute to
economic growth," he told the U.S. Chamber of Commerce.

Europe has not escaped the credit crunch, which first bit in
August when banks worldwide clammed up on lending to each other
as it dawned on them that they did not know which were
dangerously exposed to the U.S. subprime mortgage meltdown.

Securities based on home loans to Americans ill-equipped to
pay them back have cost banks hundreds of billions of dollars in
writeoffs, with more expected to come, and pushed U.S.
investment bank Bear Stearns to the brink of collapse.

Backing Trichet's predictions, Deutsche Bank said asset
writedowns and disruption to revenues stemming from the credit
turmoil could put at risk its profit goal for this year of 8.4
billion euros ($13.2 billion).

"The tone this morning is noticeably more bearish and indeed
Deutsche has effectively given a (very lightly veiled) profit
warning for 2008 on further fair value writedowns," RBS credit
analysts said in a note to clients.

Money market rates continued to show a marked reluctance to
lend between banks despite periodic injections of massive
liquidity by the world's major central banks.

The interbank cost of borrowing three-month sterling edged
up for the 12th session in a row to 6.00 percent, its highest
since late December, while three-month euro Libor rates rose to
4.72063 percent, their highest level this year.



Bank of England Governor Mervyn King was as downbeat as
Trichet, saying the credit crunch had entered a new phase.

"The financial crisis has moved into a new and difficult
phase. Across the world, confidence in financial markets is
fragile," King told a parliamentary committee.

Despite apocalyptic warnings of a new "Great Depression",
some confidence has returned on the back of sharp U.S. rate
cuts, central banks' efforts to prime money markets with as much
liquidity as required and the orchestration of a takeover of
Bear Stearns.

But economic data continues to paint a mixed picture -- U.S.
home sales rose for the first time in seven months in February
but home prices tumbled 3.0 percent year-on-year in January.

Damage has spread far and wide, hitting takeover and merger
activity too via tighter financing conditions.

The $20 billion leveraged buyout of U.S. radio operator
Clear Channel Communications Inc is in jeopardy, with banks
increasingly reluctant to provide financing, a source familiar
with the situation said on Tuesday.

If the deal falls apart, it would be the latest in a series
of leveraged buyouts to fail since the credit crisis began.

In Europe, the picture seems brighter.

Corporate morale in Germany posted a surprise rise in March
to its highest level in seven months, the Ifo research
institute's monthly poll of around 7,000 firms showed on
Wednesday, while French business sentiment also rose
unexpectedly, reaching its highest level so far this year.

The ECB has not followed the Federal Reserve's lead in
lowering official interest rates and the Bank of England has
also proved more reluctant to ease policy.

King said the BoE stood ready to provide liquidity as needed
and was working with commercial banks to seek a resolution to
the crisis. But such a solution, he said, should be paid for by
shareholders in the banks which took risks, not taxpayers.

At a meeting last week, Britain's top bankers urged the Bank
to be more generous and flexible to help fragile money markets.

King said the BoE should not follow the Fed's example with
big rate cuts and said central banks were taking similar action
to ease lending conditions by providing funds as required.

Date created : 2008-03-26