Euro bank resists cash-pumping in crisis

21st March 2009, Comments 0 comments

Europe has thus far spurned the dramatic, cash-heavy solutions of the US and Britain, focusing instead on extending credit lines to euro zone lenders and broadening the range of assets that it will accept as collateral.

Paris -- The United States and Britain have made dramatic moves to pump cash into their economies to relieve a painful downturn, but the euro zone's central bank looks unwilling to follow suit.

Since the financial crisis spread worldwide in September, central banks have struggled to restart the flow of capital with drastic measures to prompt banks to start lending again, to businesses and to each other.

Some of the biggest central banks, such as the US Fed, the Bank of England (BoE) and Bank of Japan (BoJ), have cut their interest rates almost to zero and turned to other so-called "unconventional" means to boost their economies.

The European Central Bank (ECB) has focussed instead on extending credit lines to euro zone lenders and broadened the range of assets that it will accept as collateral.

Outside the euro zone, chief among the "unconventional" moves are the mass buying of government bonds and a method of creating more money to stimulate activity, known as "quantitative easing."

The US Federal Reserve stunned the markets on Wednesday when it said it would buy up to 300 billion dollars in Treasury bonds plus 850 billion in other debt in a bid to bring down lending costs and fire up the moribund economy.

"The Fed's shock and awe approach clearly marks it out now as the most aggressive central bank in its response to monetary easing," wrote Lee Hardman, an analyst at Bank of Tokyo-Mitsubishi, on Thursday.

The Bank of England said on March 5 it would pump out 75 billion pounds of newly-created money after slashing interest rates.

And this week, the BoJ said it would boost its outright purchases of Japanese government bonds to 21.6 trillion yen (219 billion dollars) a year, up from 16.8 trillion yen, in an effort to keep credit flowing.

Washington has pressed its European allies in the run-up to a G20 meeting of worldwide economic powers in London on April 2 to play a bigger role in reviving global demand by doing more to prop up their own faltering economies.

The EU governments also face mounting calls at home to do more to jumpstart economic activity, with many companies and industries warning of sweeping job cuts if a recovery does not start soon.

The call for fresh stimulus measures has met with stiff resistance in Europe, however, particularly from Germany and France, and is expected to be a hot topic at the Group of 20 (G20) summit.

"I am against us Europeans (responding to) the American wish for more voluminous economic recovery package," said Luxembourg Prime Minister Jean-Claude Juncker on Thursday ahead of a summit in Brussels.

The ECB's president Jean-Claude Trichet said this week that the euro zone bank was considering "complementary measures" after slashing interest rates to a record low of 1.50 percent this month.

But he has not said it is considering buying government bonds.

"The US financial system relies largely on the markets, but the euro zone's centres on the banks," so the ECB will focus on refinancing them rather than pouring cash into the economy, he said.

The ECB is forbidden by a European Union treaty to provide financing for states, for example by buying government bonds, says Jean-Michel Six, senior Europe economist for the ratings agency Standard and Poor's.

Unlike the Fed or BoE, the ECB caters to 15 countries, each with its own bond market, and with varying public finance problems and risks of price deflation.

The International Monetary Fund said on Thursday that G20 countries had not done enough to fight recession. It urged more action and said buying commercial bonds from companies was a more efficient measure than buying government bonds.

Analyst Patrick O'Hare of meanwhile warned that the US measures could have unintended consequences.

"The Fed runs a heightened risk of inflating the Treasury market bubble and stoking inflation itself," he said.

And with some economic data indicating the recession may be near its bottom, he added, "the Fed has made its job of managing monetary policy that much more difficult."

Veronique Dupont/AFP/Expatica

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