–ECB SMB Currently in ‘Sleep Mode’
–Eurosystem Can Take New ‘Targeted’ Measures If Needed

By Chris Cermak

NEW YORK (MNI) – Liquidity demand has been “met in full” by the ECB
with its long-term refinancing, European Central Bank Governing Council
member Ewald Nowotny said Monday, adding the ECB’s bond purchase program
was currently in “sleep mode.”

Nowotny, in a presentation at the Stern School of Business in New
York, also said that should market stress return, the “Eurosytem can
decide on new targeted measures if need be,” while the ECB’s “full
allotment in refinancing operations” also remains in place.

The ECB’s bond purchase program “had been successful
when it was used” in the past, “but it is not something that can be used
permanently,” he said

And the ECB’s three-year LTROs has become the primary tool for
introducing liquidity and contributed to a “cautious” return of
confidence, he said. The LTROs were primarily used by banks to replace
maturing liabilities, but also to improve credit access to small and
medium sized businesses.

But Nowotny said the “big increase in the deposit facility” of the
ECB remains a “matter of deep concern.” The challenge is still “to
create an atmosphere that money markets are fully starting to work
again.”

At the same time, Nowotny said it was possible the three-year LTROs
put in place by the ECB could be returned more quickly. The early
repayment option after one year “will be exercised as soon as bank
refinancing conditions improve significantly.”

Still, an ECB exit strategy is “not something that is of immediate
concern.”

Nowotny also warned that economic convergence within the Eurozone
had proved much more difficult than policymakers had expected when the
euro was introduced.

“Economic divergences in the euro area will last much longer and be
much more stubborn than we have anticipated,” he said.

Nowotny also said one of the challenges for Eurozone governments
remains improving fiscal coordination: “Monetary policy needs an
equivalent on the fiscal policy side.”

** MNI Washington Bureau: 202-371-2121 **

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