Tags: trichet | banks

Trichet: Bank Stress Tests Welcome

Thursday, 08 Jul 2010 12:00 PM

 

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European Central Bank head Jean-Claude Trichet welcomed European leaders' pledge to publish the results of "stress tests" on banks and indicated Thursday that the need to calm markets by buying troubled government bonds appears to be diminishing.

Trichet also sounded an upbeat note on the 16-nation eurozone's economy after the bank kept its benchmark refinancing rate untouched at a record low of 1 percent, saying that recent data don't support "excessively pessimistic" views.

With rates on hold and no sign of any move soon, much of the attention after Thursday's decision focused in part on the planned July 23 publication of "stress tests" on European banks, intended to reassure markets worried that some banks might be hiding losses on government bonds and other debt from financially troubled countries such as Greece, Portugal and Spain.

Trichet dismissed suggestions that the outcome could add to Europe's ongoing debt crisis by revealing new problems. He said the ECB has been "convinced since the very beginning that transparency has its virtue, and that it is good that the market ... can see exactly what is the result of those tests.

"We think that it is confidence-building," he told reporters.

Trichet welcomed European Union leaders' pledge last month to disclose results of individual banks' tests in an effort to dispel such fears.

The tests are designed to show how banks would do if circumstances worsen. Trichet said that "appropriate action will have to be taken where needed" but went into little detail of the ECB's expectations.

The tests will cover 91 banks in Europe, representing 65 percent of the European banking sector.

On a related front, Trichet appeared satisfied with the smooth expiry last week of a record batch of unusual 12-month loans to banks, aimed at supporting the financial system with added ready cash.

As the euro442 billion ($557 billion) in credit came due, the ECB lent a lower-than-expected euro131.9 billion to banks for the three months; banks that apparently are more confident borrowed euro111.2 billion in a six-day operation.

Trichet said that "we are still in a mode ... of unlimited supply of liquidity" over periods of up to three months.

He also gave no indication as to when the ECB might end the program it launched in May, in the depths of the debt crisis, to buy eurozone government bonds. That was aimed at boosting investors' confidence in government debt and helping countries avoid default.

"We have the feeling - but we will continue to observe that with great attention - that what is needed in terms of level of interventions on our part has been progressively diminishing," Trichet said.

The ECB president didn't offer new hints on when it might start raising interest rates, unchanged since May 2009.

After economic activity strengthened during the spring, eurozone gross domestic product is expected to keep growing at "a moderate and still uneven pace, in an environment of high uncertainty," he said - with inflation rates remaining "moderate" in 2011.

While Trichet "struck a somewhat more positive note on the financial sector, we continue to see the first rate hike only in the second half of 2011," said Carsten Brzeski, an economist at ING in Brussels.

"It looked as if Trichet's main objective was to convey confidence," he added. "Whether this was just whistling in the dark or deep conviction remains to be seen."

Also Thursday, the Bank of England left its base interest rate at a record low of 0.5 percent for the 17th straight month and left its asset purchasing program on hold. Britain's economic recovery remains fragile and public spending cuts are expected to hamper future growth.

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