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ECB May Step Up Crisis Response Next Month, Council Members Say

ECB ‘Ready’ to Ease Dollar-Market Tensions
The euro sign sculpture stands outside the European Central Bank (ECB) headquarters in Frankfurt, Germany. Photographer: Hannelore Foerster/Bloomberg

The European Central Bank may step up efforts to boost growth and ease financial-market tensions as early as next month, Governing Council members said.

Austria’s Ewald Nowotny and Belgium’s Luc Coene said in Washington that potential measures include the reintroduction of 12-month loans to banks. Asked if an interest-rate cut is warranted, Coene said while that wouldn’t help to bring down longer-term borrowing costs, “the ECB has never ruled out things beforehand.”

“If the data in early October shows that things are worse than we anticipated we will look at the kind of decisions we have to take for that,” he said in an interview late yesterday.

European policy makers are under pressure from counterparts around the globe as their failure to contain the region’s sovereign-debt crisis stokes concern the world is on the brink of another recession. Their comments come as European officials debate how to increase the size of their bailout fund to restore confidence in its firepower.

With money-market tensions increasing, the ECB has already reintroduced a six-month loan and continues to offer banks as much cash as they want at its benchmark rate in weekly, monthly and three-month refinancing operations. It last conducted a 12-month loan in December 2009.

“The ECB will probably discuss reintroducing a 12-month tender,” Nowotny told reporters in Washington today. “We could perfectly do that when we feel there is an urgent need for that -- I don’t think so for the moment, but it could be in two weeks,” Coene said. The ECB council next convenes on Oct. 6.

Rate Cut Forecasts

Economists at Barclays Capital, JPMorgan Chase & Co. and Royal Bank of Scotland Plc predict the ECB will also be forced to reverse course on interest rates after raising them twice this year to curb inflation. The benchmark rate is currently 1.5 percent, compared with near-zero for the U.S. Federal Reserve and Bank of Japan, and the Bank of England’s 0.5 percent.

ECB policy makers are attending the annual meetings of the International Monetary Fund and World Bank in Washington. President Jean-Claude Trichet gives a speech here at 4:30 p.m.

German council member Jens Weidmann said a new recession is “unlikely” and the global economic situation is better than current sentiment would imply. Even so, the risk that turbulence on financial markets spills over into the real economy cannot be excluded, he said, adding the ECB has shown in the past that it’s “ready to provide the market with liquidity, also with longer maturities if necessary.”

G-20 Pledge

Finance chiefs from the Group of 20 yesterday pledged a “strong and coordinated international response to address the renewed challenges facing the global economy.”

Many G-20 members pressed Europeans to follow through on a July plan to expand the powers of the region’s rescue fund, Japanese Finance Minister Jun Azumi told reporters.

European parliaments are focused on approving the July agreement to expand the scope of the 440 billion-euro ($594 billion) European Financial Stability Facility to allow it to buy the debt of stressed euro-area governments, aid troubled banks and offer credit lines. Its current role is to sell bonds to fund rescue loans for cash-strapped governments.

‘Problematic Discussions’

“We really, really hope that it will be up and running by mid-October, but you know yourself how problematic the discussions in some countries are,” Nowotny said. After legal ratification, it may take another six to eight weeks for the EFSF to start intervening, he added.

The ratification process has drawn fire from some investors for being protracted and failing to provide the fund with enough cash to prevent the crisis leaking beyond Greece. Curbing the scope of policy makers to do more is the suspicion taxpayers in AAA-rated countries such as Germany and Finland would balk at stumping up even more rescue cash.

That has fanned speculation Europe may eventually ratchet up the fund’s spending power, perhaps by using the bonds it sells as collateral to borrow more cash from the ECB. Another proposal is to mimic a U.S. program established following the 2008 collapse of Lehman Brothers Holdings Inc. by allowing the fund to offer the ECB credit protection for buying more sovereign bonds.

EFSF Firepower

“It is very important that we look at the possibility of leveraging the EFSF resources and funding to have a stronger impact and make it more effective,” European Union Monetary Affairs Commissioner Olli Rehn said in Washington yesterday. French Finance Minister Francois Baroin said separately that policy makers “need the right firewall to prevent contagion” and can discuss giving the fund “the necessary strength.”

Weidmann has said he opposes turning the EFSF into a bank that can refinance itself at the ECB as it would amount to “monetizing state debt.” Coene also said he’s “not sure that will be a good idea.”

Coene signaled reluctance to step up the central bank’s government bond purchase program even after the IMF said Sept. 20 the ECB “must continue to intervene strongly” in European debt markets to “maintain orderly conditions.”

“I think it has been a helpful element in the beginning but of course it cannot be a structural element of the system,” the Belgian central banker said. “The main reason was that we wanted to keep the transmission of monetary policy as good as possible until the moment that the EFSF will be able to take over” the bond buying, he said.

The ECB was forced to restart the purchases last month after governments failed to convince investors they can solve the crisis which, according to a research paper published by the ECB this week, is putting the survival of the euro at risk. ECB Executive Board member Juergen Stark, a co-author of that paper, resigned this month to protest the bond program.

ECB Vice President Vitor Constancio said in Frankfurt last night that sustained bond purchases by the central bank would only delay the fiscal adjustments that euro-area governments need to make.

So far, only seven of the euro area’s 17 governments have ratified the upgrade of the EFSF.

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