German Central Bank Warns on ECB Crisis Measures
Germany's top central banker has urged the European Central Bank to come up with a plan to eventually withdraw its massive emergency loans to banks, warning that they carry significant risks and have only bought Europe time to deal with the deeper causes of its debt crisis.
Bundesbank head Jens Weidmann said Tuesday that the ECB and national central banks had run up risks by loosening collateral requirements for the loans and from the sheer size of the loans — and therefore needed to be aware of the pitfalls.
That does not mean that crisis measures need to be withdrawn now but that "we as central banks must develop an idea of how we will organize and execute an exit from the special measures, how we will limit the risks that we have taken during the crisis, "Weidmann said at the Bundesbank's annual news conference.
By loosening collateral requirements, the ECB gave banks more than euro1 trillion ($1.31 trillion) in loans in two operations Dec. 21 and Feb. 29. The actual amount of new cash in the system is around euro500 billion because banks moved some of their loans from other ECB offerings to these new ones, called longer term refinancing operations, or LTROs.
Weidmann also noted that the loans will help prop up banks with unsustainable business models, and that governments will slack off on their efforts to clean up their finances and reform their economies.
"A sensible limitation of risks starts with the causes," Weidmann said. "With these measures we have only bought time."
ECB head Mario Draghi urged banks and governments to use that time wisely to strengthen themselves and help the wider economy to return to growth.
"Countries should use this phase of financial stabilization to make further progress on their programs of economic reform to strengthen their potential growth, to boost unemployment and to enhance competitiveness," he said in a speech to an economic conference in Paris. "Banks, too, should use this currently more benign environment to strengthen their resilience further."
He said that by reinvesting their profits — and not distributing them in bonuses and dividends — banks could make more loans to the so-called "real economy" — households and businesses.
The ECB's 3-year emergency loans at a current interest rate of 1 percent have been credited with helping ease Europe's government debt crisis by steadying banks that could not borrow elsewhere. It also helped governments borrow affordably as some banks used the fresh cash to buy government bonds.
Weidmann, who sits on the ECB's 23-member governing council and apparently voted for the emergency loans, acknowledged that the extra liquidity had eased severe tensions in financial markets.
Although he only carries one vote, Weidmann's views carry particular weight because he comes from the Eurozone's biggest economy. The Bundesbank has a reputation for defending anti-inflation monetary policy and strict adherence to the EU treaty provisions barring the central bank from supporting the finances of governments.
With the emergency loans, the ECB took on additional risk by broadening the range of financial assets it accepted as collateral. It says it is managing those risks by demanding in some cases far more collateral than the amount of the loans.
Some have also been concerned that the loans could eventually push up inflation, but Draghi stressed that price increases remain in check.
"We are continuously alert to the risk of inflation, but this risk is not materializing at the present time," he said, adding that the ECB has a tremendous record of price stability and that he was committed to maintaining that record.
New governments in Italy and Spain are tackling the deeper causes of the government debt crisis that has pushed Greece, Ireland and Portugal to take international bailout loans. They are trying to loosen rules on hiring and firing that have held back economic growth and high unemployment, particularly among young people.
But those steps will take years to have an effect. The ECB moves are viewed as buying the Eurozone time, but a key question is whether lower pressure from financial markets will cause politicians to see less urgency in making controversial changes in their economies.
In an interview in the Frankfurter Allgemeine Zeitung published Monday, Weidmann said that the ECB was carrying out its key role as lender to banks, but added "it is not the task of monetary policy to artificially keep insolvent banks alive or to secure the solvency of states."
He conceded that it may be difficult to tell whether banks are suffering temporary cash shortage or are facing insolvency. "In crisis situations a certain flexibility is called for," he wrote.
The Bundesbank on Monday said that its profit for 2011 fell to euro600 million from euro2.2 billion the previous year. The reason was the bank's decision to add to its risk buffer against possible losses on government bonds that the European central bank system has bought or on any possible losses on loans to banks. The money was paid to the German government.
Source: Agence France Presse
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