THE EUROPEAN Central Bank (ECB) has moved to extend its exceptional liquidity operations for the banking sector as it battles renewed financial market tension flowing from the euro sovereign debt emergency.
The decision to give banks access to unlimited three-month funds at a fixed rate in July, August and September came as Herman Van Rompuy, president of the European Council, said the €750 billion EU/IMF rescue net for distressed euro countries would be enlarged if it did not dampen the crisis.
The move marks a further reversal of the ECB’s strategy of withdrawing the extraordinary support measures it put in place in the wake of the Lehman Brothers bankruptcy in autumn 2008.
With commercial banks parking record amounts of cash in the central bank’s low-yielding but safe overnight facility, ECB president Jean-Claude Trichet said it was clear money markets were not functioning perfectly. “We see clearly that there is an illustration of these tensions . . . as regards the demand for liquidity and of course what we are observing in our deposit facility. So we are observing that,” he said.
As the bank’s governing council left its core interest rate unchanged yesterday at a historically low 1 per cent, it revised upwards the range of its projection for euro zone gross domestic product growth to between 0.7 per cent and 1.3 per cent from between 0.4 per cent to 1.2 per cent in light of “stronger activity worldwide in the short run”.
Due to “domestic demand prospects” however, the bank revised downward its 2011 growth projection to between 0.2 per cent and 2.2 per cent from between 0.5 per cent and 2.5 per cent.
Mr Trichet said the ECB will continue to buy up government bonds following its emergency decision last month to intervene in the sovereign debt market for the first time, but declined to say which countries were taking part or its duration. “It’s appropriate to continue to do what we’ve decided,” Mr Trichet said. “The purpose has been very clearly said and we think that we give enough information at this stage.”
The euro rose yesterday as Mr Trichet said the bond purchase plan should not be viewed as a change to the bank’s monetary policy. Late yesterday, the single currency was 0.96 per cent higher at $1.21 from a previous session close of $1.1985. Mr Trichet also implicitly rebuked Axel Weber, chief of the Germany’s Bundesbank, for making public his opposition to the manoeuvre.
“There is one currency. There is one ECB. There is one governing council and . . . because we are an institution which has to take decisions including on the basis of this credible alertness that characterises our own institution, there is only one decision.” The purchase of government bonds flowed from the emergence of acute market tension at the time of the bank’s rate-setting meeting last month, in Lisbon. “It was observed the world over as a major event that was threatening the functioning, not only of the European economy and market, but also the global finance and the global economy.”
Mr Van Rompuy, speaking to a Belgian magazine, raised the prospect of an expansion in the rescue. “Currently there isn’t even the hint of a request to put this rescue plan into practice. And if the plan were to prove insufficient . . . we’ll do more,” he said.
The plan received a boost yesterday when the German constitutional court rejected a challenge to Berlin’s participation which came from chancellor Angela Merkel’s own Christian Democrat party.
Talks in Spain on the reform of rigid labour laws broke down fanning pressure on prime minister José Luís Zapatero. He promised his government will proceed with “substantial” changes but is opposed by the unions.
