ECB urges new government to proceed with recapitalisation

EUROPEAN CENTRAL Bank (ECB) chief Jean-Claude Trichet urged the incoming government to proceed with the €10 billion recapitalisation of AIB, Bank of Ireland and the EBS and said it should execute the agreed terms of the EU-IMF bailout.

Mr Trichet also said the ECB planned to continue providing unlimited emergency funding for distressed banks for the next three months, a move that will benefit Irish banks it is supporting to the tune of some €130 billion.

Asked about the ECB’s concern about “addicted banks” who are hugely reliant on its emergency liquidity, he implied that moves may be under way to wean banks off such schemes. “If and when we have a plan we will announce it,” he told reporters.

While the outgoing Government breached the terms of the EU-IMF deal by delaying a €10 billion cash injection into the three banks last month, Mr Trichet said he expected the new administration to fulfil that condition. “For us the plan is the plan and this is in the plan,” he said.

Mr Trichet declined to express a view on imminent moves by taoiseach-in-waiting Enda Kenny to seek a lower interest rate on Ireland’s bailout loans but said in clear terms that he expected the new government to execute the EU-IMF programme.

“There is a plan and for us this plan has been approved by the IMF, has been approved by the European [authorities] after due analysis by the commission in liaison with us. We call of course [for] the plan to be applied,” he said.

Speaking as he signalled the first euro zone interest rate rise for almost two years, Mr Trichet said the ECB will carry on providing unlimited funding for banks at its three-month operations for the next three months. Until at least July 12th, it will keep full allotment at its weekly and one-month operations.

The bank sees the continuation of such schemes while moving interest rates off their current record lows as a separation of standard and non-standard measures.

“Particularly when we have a shock – and we have a shock – our responsibility is to prevent a second round of effects,” he said in reference to the sudden increase in oil prices since a surge of unrest in the Arab world.

The euro rose to a four-month high against the US dollar after Mr Trichet signalled a 0.25 per cent rise next month.

He warned, however, that a rate hike next month was not certain and cautioned against the interpretation that a series of increases was now likely.

“I would certainly not embark on anything more and it is certainly not a sense that it is the start of a series of interest rate increases,” he said.

“It is true that we have considered and taken into account the fact that the balance of risk that was coming from the economic analysis was as we had said at the meeting in January and February: there is a risk it could move on the upside.”

By saying the ECB was exercising “strong vigilance” over rising inflation, however, he used an expression the bank often uses to signal that a rate rise was but one month away. “Strong vigilance is warranted with a view to containing upside risks to price stability,” he said.

The ECB frequently used the phrase when raising rates in the 2005-2007 period.

With the negotiation of reforms to the euro zone bailout fund set to culminate this month, Mr Trichet repeated the bank’s concern that new economic governance measures are too weak and do not amount to the quantum leap he has been seeking.

Mr Trichet also expressed concern about Hungary’s decision to remove some powers from its central bank to appoint policymakers. “We are very unsatisfied with the position taken by the Hungarian government and we will see exactly what are the appropriate steps to take into account,” he said in reference to possible legal action by the European Commission.