ECB Said to Consider More Measures to Stimulate Bank Lending

The European Central Bank may announce a range of measures tomorrow to stimulate bank lending, said three euro-area officials with knowledge of policy makers’ deliberations.

Options on the table include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to grease the flow of credit to the economy, said the officials, who spoke on condition of anonymity because the discussions are private. Two said an interest rate cut is likely, with only the size of the reduction to be determined for the monthly decision tomorrow.

The ECB is focusing on getting banks lending again rather than increasing its government bond purchases to fight Europe’s debt crisis. The central bank’s insistence that governments take measures to restore investor confidence appears to have paid dividends, with Italian and Spanish yields plunging after Germany and France agreed to move the 17-nation euro area toward a fiscal union, a stance they reiterated today.

“The ECB’s role tomorrow is going to be pretty much about the banks, and after tomorrow the liquidity side should be on a much stronger footing,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London. “The division of labor is very clear -- the ECB takes care of the banks, and the sovereigns take care of the fiscal side.”

Joint Letter

French President Nicolas Sarkozy and German Chancellor Angela Merkel proposed amending European treaties to tighten rules on deficit spending and water down provisions demanding investor losses. In a joint letter to European Union President Herman Van Rompuy, the leaders said they want a decision at an EU summit starting tomorrow so that the measures can be ready by March 2012.

Still, Germany rejects proposals to combine the region’s current and permanent rescue funds, a German government official told reporters in Berlin today on condition of anonymity because the negotiations are private.

The ECB has indicated it will act to prevent a credit shortage as this falls within its monetary policy remit.

President Mario Draghi said on Dec. 1 that the ECB had “observed serious credit tightening” recently and is “aware of the continuing difficulties for banks, due to the stress on sovereign bonds, the tightness of funding markets and scarcity of eligible collateral in some financial segments.”

Crisis Fixes

Most international investors predict at least one nation will eventually dump the euro and they say greater fiscal ties or a smaller currency area are the best fixes for the region’s debt crisis, according to the quarterly Bloomberg Global Poll published today.

As Europe’s leaders craft their fifth “comprehensive” solution in 19 months, almost half the respondents in the poll conducted Dec. 5-6 say one or more countries will leave the 17-nation bloc within a year and almost a third more predict an exit by the end of 2016. Thirty-seven percent say fiscal union is the most effective remedy for the current turmoil, with 24 percent endorsing a shrinking of the euro’s membership.

Draghi holds a press conference at 2:30 p.m. in Frankfurt tomorrow, 45 minutes after the ECB’s rate decision is announced.

ECB Collateral

Policy makers may seek to broaden the pool of eligible collateral for ECB loans by loosening rules governing the use of asset-backed securities, the officials said. They may also increase the amount of uncovered bank bonds that can constitute a lender’s collateral portfolio from the current 10 percent limit, they said.

The ECB is already lending banks as much money as they want against eligible collateral for periods of up to a year. It is likely to add two-year loans to its arsenal, two officials said. While a three-year loan has been discussed, it is unlikely at this stage, they said.

One official said longer-term loans might encourage banks to lend to companies and households, and they would also help financial institutions meet new Basel rules on holding longer-term liquidity.

Tomorrow’s meeting is the ECB’s last scheduled opportunity to take policy action this year. It will be accompanied by publication of the central bank’s latest projections, including a 2013 inflation forecast that may justify further monetary stimulus.

Worsening Outlook

Draghi said last week that the ECB’s goal is to maintain price stability “in either direction,” suggesting it would act as forcefully to prevent a significant undershooting of its 2 percent ceiling as it would to stop an overshooting.

“This applies to both the setting of official interest rates and the implementation of non-standard measures,” Draghi said.

One official said the economic outlook has deteriorated markedly since Draghi said on Nov. 3 that the ECB expected a “mild recession.”

Policy makers will cut the benchmark rate by a quarter percentage point to 1 percent, according to 53 of 58 economists in a Bloomberg News survey. Only two predict a half-point reduction to 0.75 percent.

(Updates with comment from economist in fourth paragraph, Merkel, Sarkozy developments from fifth graph. For more on Europe’s debt crisis, see EXT4.)
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