FRANKFURT (MNI) – The European Central Bank cannot accept
government bonds as collateral from a Eurozone member state in default,
outgoing ECB President Jean-Claude Trichet said in a newspaper interview
released Tuesday.

“We cannot accept the securities of a state in default, even for a
short period of time, as collateral for the refinancing of banks without
an appropriate credit enhancement,” Trichet told German daily Die Welt.
“Our position has not changed.”

On the financial safety net, Trichet said the enhanced EFSF would
be able to intervene in the secondary market. “The stability of the
European financial system will in the future be guaranteed by the
governments via the EFSF.”

Asked about the potential capacity of an expanded EFSF, Trichet
said governments must first implement all the decisions of the EU summit
of 21 July and provide appropriate leveraging of the fund.

“It is crucial that the banks put their balance sheets in order as
quickly as possible,” Trichet reiterated, adding that they should build
up a stronger equity position by retaining profits and being less
generous with bonus payments.

Turning to the ECB’s provision of unlimited liquidity, Trichet said
the bank’s non-standard measures had not increased the risk of
inflationary pressures taking hold.

Fears of inflation as a byproduct of flooding the market with new
money are totally unfounded, he said.

Trichet defended his eight years in office, saying criticism that
the ECB had lost some of its independence during his time there was
completely inaccurate.

“We are fiercely independent of governments and pressure groups.
All our decisions are made fully independently by the 23 members of the
ECB’s Governing Council. And we are totally devoted to our primary
Treaty mandate of price stability,” he asserted.

The ECB has delivered price stability over 13 years with an annual
inflation rate of 2.0% for the euro area as a whole and 1.55% for
Germany, he said.

“This is better than any time over the previous 50 years.”

–Frankfurt Bureau +49 69 720 142; email: frankfurt@marketnews.com–

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