THE EUROPEAN Central Bank is intensifying emergency support for beleaguered banks, but has reiterated its position that it will not provide loans to the euro zone bailout fund.
As the ECB defied pressure from the International Monetary Fund for an interest rate cut, it introduced a new long-term emergency liquidity scheme in an effort to prevent a new credit crunch in the euro zone.
The development comes as France and Belgium spar over the cost of breaking up the stricken Dexia bank. The abrupt demise of Dexia has increased anxiety that its troubles could spread to other weakened lenders.
Outgoing ECB chief Jean-Claude Trichet called for a strengthening of bank capital generally, but would not say by how much. However, he said Europe’s bailout fund – the European Financial Stability Facility – should be deployed if necessary to lend to governments for capital infusions into banks.
While the assets of the facility should be “leveraged” to maximise its efficiency, he insisted the ECB would not provide special lending facilities. “The governing council does not consider it would be appropriate that the central bank would leverage the EFSF.”
Analysts questioned how such leveraging could be effectively achieved. “The EFSF is simply not large enough to provide support to both troubled banks and troubled sovereigns,” said Sony Kapoor, chief of the Re-Define think tank in Brussels.
Mr Trichet issued a fresh warning about the deepening threat from the ongoing turmoil. “The economic outlook remains subject to particularly high uncertainty and intensified downside risks,” he told reporters in Berlin.
He was speaking after his last rate-setting meeting of the ECB governing council, which kept the main rate steady at 1.5 per cent. He hands over next month to Italian central bank chief Mario Draghi. He said the interest rate decision was taken by consensus, an indication that the decision was not unanimous and that the bank’s policy-makers were split. “There has been a discussion of the pros and cons of decreasing rates, as well as the pros and cons of maintaining rates where they are.”
He dismissed criticism of ECB policies towards Irish banks. “The ECB and the euro system have been very, very forthcoming vis-a-vis Ireland as all figures are demonstrating, extraordinarily forthcoming,” he said.
“That being said, I also do say that Ireland has done a good job, a rather good job, and that the credibility of Ireland is visibly improving I would say, month after month.”
All EU-IMF bailout recipients should “stand ready” to take any additional measures that may become necessary, he added.
Separately, EU commission chief José Manuel Barroso said efforts were under way to strengthen banks. The details remain sketchy, but the issue is set to dominate an EU meeting on Monday week. Global markets rallied for a third day in expectation of a new initiative. As tension escalates in inter-bank funding markets, the ECB declared plans for two longer-term liquidity schemes. A programme this month will have a duration of 12 months and a December plan will be for 13 months, meaning emergency support for banks will continue into 2013.
“These operations will be conducted in addition to the regular and special-term refinancing operations, which remain unaffected,” Mr Trichet said. The ECB will also initiate a €40 billion covered bond programme next month.
The governing council meeting in Berlin was one of two per year outside its Frankfurt headquarters. Jens Weidmann, chief of the Bundesbank, paid tribute to Mr Trichet. “It is no overstatement to say that you, Jean-Claude, have fought passionately and with tireless and unconditional conviction to overcome the European debt crisis.”
Mr Trichet said he was “very moved” to hear such remarks, adding that the recent years had been very demanding.
