Leadership

Market distortion prevented by gradual exit - Trichet

07.12.2009
A gradual withdrawal from the extraordinary stimulus measures put in place by the European Central Bank (ECB) to combat the effects of the global financial meltdown will prevent market distortion and wean banks off their dependence on central bank support, ECB President Jean-Claude Trichet said today.

Trichet made his remarks before the Economic and Monetary Affairs Committee of the European Parliament.

Last Thursday, the ECB began the gradual phasing out of some extraordinary liquidity measures.

Trichet said this decision was made because such measures will now no longer be needed to the same extent as in the past.

“This will avoid distortions associated with maintaining non-standard measures for too long. It is important to avoid a situation in which banks are heavily dependent on exceptional central bank financing,” he said.

“In the context of a stabilisation in the money markets, incentives have to be strengthened for banks to restructure their balance sheets through recapitalisation. In addition, a timely and gradual phasing-out should help activity in the money market and strengthen peer monitoring among banks.”

However, the ECB President said that broad ECB support was still there for European banks: “We will continue to fully accommodate banks’ liquidity needs at fixed interest rates in all our main refinancing operations for as long as is needed – and at least until mid-April next year.”

Trichet also stressed that any phasing out of extraordinary financial measure must be “timely and gradual”.

“It must be timely, because one should exit neither too early, nor too late – any ex ante bias is not justified. The phasing-out must be gradual, because the situation is improving only gradually and downside risks remain,” he added.