3rd Dec 2022

ECB offers new loans to banks in 'worst crisis since WWI'

  • Jean-Claude Trichet will be replace by Italian central banker Mario Draghi (Photo: European Commission)

The European Central Bank has announced new loans to banks amid mounting fears across Europe of a fresh credit crunch paralysing the continent’s economy.

In his last press conference as president of the Frankfurt-based institution, Frenchman Jean-Claude Trichet on Thursday (6 October) said that the ECB would be providing unlimited 12-month and 13-month loans to banks and that the bank would purchase some €40 billion in covered bonds - debt securities backed by cash flows from mortgages or government loans.

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However, the central bank held interest rates unchanged at 1.5 percent despite increasing signs of European economic growth stalling and widespread calls for the institution to relax its hyper-vigilant focus on inflation.

Currently running at a higher-than-expected three percent in the eurozone, inflation now stands above the ECB’s self-imposed ceiling of “below but close to two percent”.

But Trichet conceded that members of the bank’s governing council did debate whether to reduce rates and said that there was “consensus” but not unanimity on the maintenance of the current stance, code for the existence of a dissenting minority that backed rate reductions.

The bank chief said that real GDP growth in the euro area “is is now expected to be very moderate in second half of this year” off the back of moderation in global demand, declining consumer and business confidence and continued tensions in financial markets.

“The risks to the economic remain on the downside,” he told reporters, with “particularly high uncertainty.”

Speaking of the decision to throw the banks a liquidity lifeline and the central bank’s moves at the beginning of the crisis to do the same, he said that Europe is undergoing “the most serious crisis since the Second World War - perhaps even the First World War.”

The ECB’s moves come as European leaders pronounce themselves ready to provide a massive, multi-billion bail-out of the area’s banks - once again.

On Thursday, European Commission President Jose Manuel Barroso said that plans were being readied for a recapitalisation of European banks.

“It is important to pursue the efforts already under way, they are already under way, following the last stress tests, the banks are making an effort for recapitalization,” he told reporters following a meeting with Finnish Prime Minister Jyrki Katainen.

While he would not be drawn on how much he felt would be needed, he called for a co-ordinated approach between member states so as to not create distortions in the EU’s single market.

“I believe a common, or at least a co-ordinated approach is of course wise to be considered, because some of these issues have a very important effect also in the single market,” he said, meaning a series of national plans co-ordinated amongst the capitals, rather than a single European bail-out.

He made similar comments during a television interview on Thursday morning with EU citizens broadcast via YouTube: "We are now proposing member states to have a co-ordinated action to recapitalise banks and so to get rid of toxic assets they may have.”

Officials are rushing to put together the bail-out plans following the sudden liquidity crisis engulfing Franco-Belgian bank Dexia, currently in the process of being broken up, bailed out and facing possible nationalisation due to its inability to access credit off the back of its exposure to Greek sovereign debt.

The IMF has said that European governments will have to provide between €100 and €200 billion in public funds to shore up its banks.

Until this week, EU officials publicly insisted that there was no problem in the area’s banking system, as only nine banks had failed stress tests of the institutions performed by the European Banking Authority in July and were in the process of a recapitalisation costing in the region of €2.5 billion.

However, the now troubled Dexia had passed the stress tests with flying colours and most analysts fear that many more large European banks are on the verge of collapse as trust between the institutions has dried up interbank lending - the cash infusions that keep banks alive from day to day.

The comments from the commission president come after German Chancellor Angela Merkel signalled Berlin’s support from widespread capitalisation on a visit to Brussels on Wednesday: "I think it is important, if there is a general view that the banks are not sufficiently capitalised for the current market situation, that one does it.”

"The German government, as the finance minister has made very clear in the last two days, stands ready to implement such a capitalisation of the banks if it is needed," she said following a meeting with Barroso.

Merkel added that EU leaders are ready to discuss the rescue plans, which are still being finalised, at the bloc’s autumn summit in the European capital from 17-18 October. Eurozone premiers and presidents will also hold a separate pow-wow on the second day of the meeting.

The German leader also said that such a discussion will likely have to involve consideration of adjustments to Greece’s EU-IMF bail-out.

No decision has been made as to whether bank recapitalisation should be done via the eurozone’s €440 billion rescue fund or member states themselves.

Both Barroso and Katainen refused to be drawn on the question. The Finnish prime minister did however say that governments must first press banks to try to raise cash from the markets but that if that were not possible, that a public back-stop would be necessary.

France, whose banks have the greatest exposure to Greek sovereign and private debt, remains opposed to the use of the European Financial Stability Fund out of fears that its commitments to the rescue fund would jack up its public debts and threaten its triple-A credit rating. Paris would prefer a programme of guarantees and the purchase of preference shares.

The ECB for its part is also opposed to a leveraging of the EFSF via the ECB.

“We are ... calling on governments to leverage themselves with the maximum amount of power of their own funds to ensure financial stability. We are calling on the banks to reinforce their capital and relying on the European Banking Authority and decisions taken at the level of the Eu as whole to do that as fast as possible,” said Trichet on Thursday.

Trichet said that the EFSF can leverage itself via the markets alone and did not need access to ECB lending.

ECB returns to markets to help Italy and Spain

The European Central Bank has decided buy bonds from troubled eurozone countries after a five-month pause in a bid to stem the crisis from spilling to Italy and Spain.

ECB will not become bank of last resort, Draghi says

In his first appearance as head of the ECB, Mario Draghi has said the Frankfurt-based bank will not become the lender of last resort for the eurozone. The bank lowered its interest rate by 25 basis points to 1.25 percent.

Merkel, Sarkozy will do ‘whatever necessary’ to bail-out banks

Financial markets hoping for the outline of some grand strategy for dealing with the ever-worsening eurozone crisis are likely to be disappointed by the vague announcement offered up by the French president and German chancellor after emergency talks in Berlin on Sunday.

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