Pressure on banks to hoard capital is making recession worse, says Trichet

EUROPEAN CENTRAL Bank (ECB) president Jean-Claude Trichet issued repeated warnings to financial markets at the Davos economic forum to stop pressurising banks to hoard more capital, stressing that it was exacerbating the worldwide recession.

Mr Trichet said in some cases the markets were “pushing much too violently” for banks to set aside more cash to cover rising loan losses, adding that they were “playing against what we consider to be appropriate” and that this was wrong.

Ireland’s largest banks, Allied Irish Banks and Bank of Ireland, have received €2 billion each from the Government – with the option of an additional €1 billion each – to shore up their capital base against market demands for high capital ratios to absorb higher future losses on loans.

Mr Trichet said market demands for higher capital reserves in the banks did nothing to contain the worsening recession and encouraged non-financial companies to postpone investments.

Mr Trichet’s comments came as leading bankers and government leaders warned that the bank bailouts in Europe and the US could lead to a new era of financial protectionism and exacerbate the global economic crisis.

European Commission president Jose Manuel Barroso maintained that the euro had “acted as a shield” and “an anchor of stability” for certain countries amid the crisis, citing Ireland as one of the beneficiaries.

Mr Trichet dismissed concerns that the euro was threatened by the weak public finances of eurozone countries and the possibility that some countries would be forced to leave the single currency.

“I don’t see at all that the euro is at stake or the stability of the euro area is at stake,” he said.

As political issues moved centre stage on the second day, Iran promised a more positive response if the US made genuine policy changes and held out hopes of a breakthrough in the long-running dispute over its nuclear ambitions.

Speaking at a panel before the World Economic Forum, Iran’s foreign minister Manouchehr Mottaki said: “We do believe that if the new administration of the United States, as President Obama has said, is going to change its policies, not in talking but in acts, then definitely it will find in the region a creative and co-operative reaction, including from Iran.”

US officials are reportedly drafting a letter to Tehran from President Barack Obama aimed at unfreezing relations and paving the way to direct talks.

Jamie Dimon, chief executive of JPMorgan Chase and one of the few senior bankers at Davos this year, appealed to the new administration in the US to “just get on with” and devise a feasible programme to resolve the global financial crisis. He urged political and financial leaders to face up to the seriousness of the crisis, acknowledge their mistakes and move on.

“I haven’t yet seen people get all the right people into the room and close the door, and put a solution up on the wall,” he said to applause.

The second day ended with a minor diplomatic spat after Turkish prime minister Recep Tayyip Erdogan walked off the stage red-faced after verbally sparring with Israeli president Shimon Peres during a lengthy debate over the fighting in Gaza.

Mr Erdogan later said he was not given the same amount of speaking time as Mr Peres, which was “not in the spirit of Davos”.