Interbank lending tension is serious: ECB economist

19th August 2011, Comments 0 comments

The European Central Bank is taking signs of interbank lending market tension seriously but feels the situation is less dramatic than in 2008, chief economist Juergen Stark said in comments published on Friday.

"Banks in certain regions of the eurozone prefer to deposit their surplus cash with the ECB rather than lending it to other banks. We take these signals seriously," Stark told the German business daily Handelsblatt.

Eurozone banks parked 82.2 billion euros ($117.5 billion) with the ECB overnight from Wednesday to Thursday, a slight decline from the level in previous day but otherwise the highest level since August 8 when it was 145.2 billion.

Stark noted however that "the situation is not comparable to that in the autumn of 2008 after the failure of Lehman Brothers," a US investment bank that went bankrupt in September of that year, with the result that a year-old financial crisis then became a global economic crisis.

Interbank lending markets then seized up, forcing central banks to open the cash taps.

Stark also expressed scepticism regarding the chances of a so-called eurobond being created to help heavily indebted eurozone governments.

Common bonds "are the transfer union" that some in the eurozone, especially Germans like Stark, have repeatedly warned against.

Critics say a transfer union would simply allow those who have run up heavy debts to obtain financing from others who have scrupulously balanced their own accounts, and weaken pressure on the former to get their finances in order.

"It's a face-saving solution that sends the wrong signals," Stark commented.

"We would need a European constitution with sovereignty transfers from all countries. Only then would eurobonds mean anything," the economist added.

© 2011 AFP

0 Comments To This Article