By Market News International || January 24, 2012 at 17:40 GMT
Article from Forex Live
FRANKFURT (MNI) – There are indications that the Eurozone economic slowdown that had been expected potentially to worsen is subsiding instead, European Central Bank Chief Economist Peter Praet said in an interview pre-released Tuesday.
Praet told the German daily Frankfurt Allgemeine Zeitung that he didn’t expect a long phase of weakness in the euro area even if last quarter and the current one would only show feeble growth. He refused to pre-commit to more rate cuts and noted that credit conditions are already quite good in some parts of the area.“There are signs that the speed of the downturn is waning and a stabilization is gradually taking place,” Praet said. “In December an acceleration of the downturn had still been feared. Credit conditions, however, remain difficult in some sectors.”
Last quarter and the present one will presumably be “very weak,” he said, citing the various risks to growth such as the banking crisis, the sovereign debt crisis and oil prices. Asked if further rate cuts might be in the offing, Praet reminded that the ECB never pre-commits and observed that the flight to safety had led to very low interest rates on German government bonds.
“As a result, credit conditions in some parts of the Eurozone are already very, very favorable,” he argued.Still, he said, the ECB’s expectation of further economic weakening in the winter quarters is based in part on the tense credit conditions for major parts of the economy. ECB intervention has prevented a worse situation, he said, “but in a whole series of countries, the credit supply via the banks is still tight.”
As is not the case with economic growth, inflation developments across the euro area are relatively homogeneous, Praet said. He attributed this to “firmly anchored” inflation expectations. The high uncertainty of the current environment has led to a reduction of the money supply multiplier, he said. This is an important
point for the ECB, he added. Praet said the ECB had to be cautious about expanding its collateral framework further, even if “we naturally are hearing that the banks would like still more.” The measures taken so far must be implemented and false incentives avoided, he said. A boosting of the EFSF’s size is mainly for politicians to decide, he said. “Decisive in my view is that the EFSF becomes functional as quickly as possible,” he urged. “Then we can see how effectively it works.”
Asked if the ECB could forego buying government bonds, Praet said that it was up to governments to restore market confidence via an effective stabilization fund and “above all via credible reforms.” A Greek default would be dangerous for the financial markets, he said. If the proper measures are taken and reforms implemented, the program Greece is now in can work, he argued. As to whether the ECB would still accept Greek bonds as collateral in the event of a default resulting from the creditors being contractually obliged to accept losses, Praet replied, “There are ways of dealing with this problem.”
An increase in capital for the ECB and the national central banks is not currently on the agenda, he said, noting that the ECB’s capital was increased only last year. For less competitive countries to abandon the euro “is not an option at all,” he said.
–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com
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