ECB set to extend emergency support for euro-zone banks until early 2011

THE EUROPEAN Central Bank is expected this week to extend emergency support for euro-zone banks until early next year as it gauges how well the 16-country region might withstand a big US or global slowdown.

Euro-zone growth is exceeding the ECB’s expectations and signs have emerged of Germany’s rapid growth spurt becoming broader than just export-led. But on top of the US economy’s weaknesses, the threat still posed by member countries worst hit by this year’s crisis over public finances is encouraging the central bank to take a distinctly cautious stance.

ECB president Jean-Claude Trichet is expected on Thursday to announce that at least until the start of 2011 banks’ demands for weekly, monthly and – probably – three-month liquidity will continue to be met in full.

Thus its policy of unlimited liquidity provision, which the ECB sees as its equivalent of quantitative easing, will be extended into a third year.

Overall euro-zone growth data mask wide divergences, and a global slowdown would set back hopes of exports helping Greece or Portugal. Ireland, where worries have resurfaced about the cost of supporting its bank system, has strong trade links with the US.

The outcome of this week’s ECB meeting became clearer when Axel Weber, Bundesbank president, spoke recently in favour of shelving the bank’s “exit strategy” until the start of next year.

His pre-emptive comments irritated others on the ECB’s 22-strong governing council but showed even hawks on the council were not urging early action.

The ECB will keep open the option of reactivating its government bond purchasing programme, although such a step would be seen as risky by several on the council. Purchases have fallen to a trickle in recent weeks. The ECB’s main interest rate will stay at the record low of 1 per cent.

ECB forecasters have long expected slower growth in the second half of this year. Even if the US economy drags down euro-zone prospects the slowdown in Asia is not expected to be dramatic. But the ECB is not yet convinced the recovery has become self-sustaining.