NEW EMERGENCY LOANS will be offered by the European Central Bank to help steady Europe’s unstable banks.
The ECB Governing Council has also decided to resume its covered bond purchase programme as the Eurozone’s economic outlook remains subject to particularly high uncertainty and intensified downside risks.
As expected, President Jean-Claude Trichet announced measures today to address liquidity issues at European banks. Included in the measures are two longer-term refinancing operations with maturities of 12 and 13 months.
Trichet said the provision of liquidity will continue to ensure that euro area banks are not constrained on the liquidity side. He added that such “non-standard measures” taken during the period of “acute financial market tensions” are temporary in nature.
The move should offer funding security to European banks but Trichet explained that banks also need to “all that is necessary” to reinforce their balance sheets, retain earnings, ensure moderation in remuneration and to turn to the market to strengthen their capital bases.
Where necessary, they should take full advantage of government support measures, which should be made totally operational, including the possibility in future for the European Financial Stability Facility (EFSF) to lend to governments in order to recapitalise banks.
The ECB also announced a new covered bond purchase programme worth €40 billion. Bond-buying will begin in November this year and continue for 12 months.
The central bank’s previous bond-buying programme ended in June last year.
The particular bonds involved will be backed by assets including mortgages and public-sector loans.
Trichet said that growth momentum in the euro area has been dampened by a number of factors, including a moderation of global demand, falling consumer and business confidence and unfavourable effects on financing conditions resulting from ongoing tensions in a number of euro area sovereign debt markets.
Asked about the possibility of haircuts on the loans to bailout countries, including Ireland, Trichet said the rescue packages are “a work-in-progress” and the Troika is “on the ground” to make decisions.
However, he added that Ireland has been doing a “very good job” and its credibility is visibly improving month after month.
Trichet’s last moment
Trichet will hand over the presidency of the ECB to Italian central banker Mario Draghi next month.
In closing his initial remarks at today’s press conference in Berlin he said that in his eight years at the helm there were never calm waters.
But for more than four years now, we have been experiencing turbulent waters, storms, unexpected hurricanes.
Earlier today, the ECB revealed it would leave its key interest rate unchanged at 1.5 per cent.
With Trichet’s gloomy account of the downside risks to Europe’s economy today, a cut in interest rates could be forthcoming soon.
However, he also spoke about price stability as inflation rates hit 3 per cent last month – over the ECB target of 2 per cent.