Cash injections during the financial crisis have added about 600 billion euros worth of risk to the balance sheet of the European Central Bank (ECB), the bank's head Jean-Claude Trichet has said, while urging governments to limit their deficits.
AFP - Crisis action to fight cash starvation during the financial crisis has added about 600 billion euros' worth of risk to the balance sheet of the European Central Bank, its head said here on Friday.
Money markets were not yet "back to normal," ECB president Jean-Claude Trichet told the European American Press Club here, saying risk aversion remained high.
Trichet also said that there was "emerging consensus" on both sides of the Atlantic that "macro-prudential policy should become increasingly a responsibility for central banks," in a reference to responsibility for overseeing the overall risk exposure in an economy.
He said that the ECB was ready to fulfil such a function if Europe decided to use a clause of the Maastricht Treaty, under which the eurozone was founded, allowing for the ECB to take on extra responsibility.
Trichet had already referred to this possibility in remarks at the beginning of January.
Trichet said the money market had behaved abnormally for more than a year and that unusual pressures had then intensified in the middle of September last year after the bankruptcy of US investment bank Lehman Brothers.
The money market had then almost ceased to function, he said.
The ECB had adopted "exceptional" measures to provide funds to financially sound banks that could no longer obtain finance, and its own balance sheet had grown by "about two thirds," equivalent to about "600 billion euros' (756 billion dollars') worth of extra risk."
These measures had been successful "in making good the shortfall of liquidity on the interbank market," he said, "but cannot remove high concern about credit risk."
Market conditions were not yet back to normal and remained strongly affected by a high degree of aversion to risk everywhere in industrialised countries, he said.
Although some procedures would remain in effect for as long as they were needed, they would be necessarily temporary, he said, observing that the ECB wanted to see a return of normal financing for banks.
Action by different governments to shore up banks had been appropriate to the scale of the crisis, he said.
He also held that a decision by the European Commission to begin excessive public deficit procedures against six countries, including France, was "a good thing" under the constraints of the Stability and Growth Pact.
He noted that the way the pact was applied had been amended to take account of exceptional situations, and that eurozone countries had to "use the margin for manoeuvre."
Trichet has warned for years that countries in the eurozone must respect rules and principles requiring them to move their public accounts into surplus in times of growth.
He has said recently that during the current economic crisis, the EU regulation that public deficits not exceed 3.0 percent of output should be respected, while noting that some flexibility is permitted.
He said on Friday that only a return of confidence could bring order back to financial markets and to the international economy.
But a return of confidence throughout the economy depended not only on the right dosage of decisions now "but also on the capacity of policymakers to show that tomorrow they would ensure" a normal state" of public finances.
Asked about US and Japanese policy of zero interest rates, he said that such policies involved "a certain number of disadvantages" and this could be seen in the behaviour of three-month interest rates in the United States and Europe.
But the ECB was "alert and pragmatic," he said.
Trichet also implicitly rejected any suggestion that deflation might threaten the eurozone in the medium term.
He said that "we are going to have inflation which will be very, very low in the eurozone on average" this year because of the fall in the price of oil.
This was positive, but "we have anchored down anticipation of inflation in line with our definition of medium-term price stability," he said, referring to the ECB's target ceiling for inflation of just under 2.0 percent.
On the origins of the crisis, he said that "one must not get involved in identifying scapegoats" because "the responsibility lies everywhere" and "the entire system was shown to be too fragile."
Date created : 2009-02-20