ECB cash injections 'a risk to stability'

Fri, Mar 2, 2012, 00:00

GERMANY’S BUNDESBANK has warned the European Central Bank that its low-interest liquidity injections to stabilise cash-starved banks risk destabilising the wider euro zone.

As the ECB launched a second wave of three-year, one per cent interest loans, a Bundesbank letter has been leaked warning that the €1 trillion cash injection, thanks to looser collateral criteria, poses an inflationary risk.

In his letter last month Bundesbank president Jens Weidmann urged ECB president Mario Draghi to reinstate the old collateral standards.

In his letter, the Bundesbank head reportedly warned of a risk to the ECB’s reputation if its non-standard liquidity measures are continued and urged a high-level debate about the risks involved in the programme.

After 523 applications to the first round in December, more than 800 banks are now participating in the longer-term refinancing operation (LTRO) programme, the ECB said, a move it claims prevented a serious financial market crisis in the eurozone.

Neither the Bundesbank nor the ECB were prepared to comment on the letter.

Unofficially, sources in Frankfurt said the letter was part of a wider debate in the 23-member governing council about the bank’s so-called non-standard measures.

The ECB has justified the LTRO programme as necessary to compensate for a standstill in the interbank lending market, and to ensure banks have the necessary liquidity to go about their business.

It argues that it has evened out the risks by lending out far less than the face value of the assets being offered as the collateral for the loans.

Earlier this week, Mr Draghi indicated that banks should not expect any further assistance from the Frankfurt central bank.

“We’ve done enough, the collateral rules should not be loosened further,” he told the Frankfurter Allgemeine daily.

The leaked letter, in the same newspaper, follows a series of reports in German newspapers warning of the consequences of a loose liquidity policy.

“An independent central bank shouldn’t allow itself to get involved in such dangerous games,” thundered the Die Welt daily.

“In the end, everyone will pay the price for all this money, when inflation eats up hard-won savings.”