FRANKFURT (MNI) – Bundesbank Board member Andreas Dombret Wednesday
offered reassurances about conditions in unsecured U.S. dollar funding
markets while giving a relatively sanguine view of recent economic
developments in Germany.

In the text of a speech prepared for delivery at the Bundesbank’s
office in New York, Dombret said he would like to give “some assurance
about the current situation” as regards the U.S. dollar funding of
European banks.

“Without a doubt, unsecured U.S. dollar funding markets have
tightened somewhat recently…But let me emphasize that we are very far
away from the situation we witnessed in 2008,” he said.

“German and other European banks have used the rather benign market
conditions in the first part of this year and have completed an
over-proportional part — or even all — of their overall 2011 funding
needs in the capital market segment,” Dombret said.

In addition, “European banks, in general, have considerably
improved their capital bases, making them less vulnerable to financial
strains,” Dombret said.

In case of any emerging bottlenecks, banks now also have other
sources of funding available, including via the European Central Bank’s
swap agreement with the U.S. Federal Reserve, he added.

After the ECB’s dollar funding operation was tapped last week for
the first time since February, concerns arose that European banks may be
increasingly locked out of the unsecured dollar market. However, zero
uptake in ECB dollar offers earlier today started to calm such fears.

On the German economy, Dombret said that the pronounced drop in the
quarterly growth rate to 0.1% q/q in the second quarter from +1.3% q/q
in the first “should be no cause for concern.”

The strong expansion in the first quarter was in part due to
catch-up effects, Dombret said. “This suggests, of course, that the GDP
growth figure for the second quarter understates the underlying cyclical
momentum.”

“Recent leading indicators suggest a continuation of the upswing,
albeit at a more moderate pace than before,” Dombret added.

Earlier Wednesday, Germany’s key Ifo sentiment index dropped more
than expected to hit the lowest level since June 2010. Analysts said the
sharp drop of the expectations index, the second highest on record after
the one in July 2008, was particularly alarming.

On Tuesday, Germany’s ZEW investor climate indicator also
disappointed expectations. Financial market investors’ expectations for
the next six months hit the lowest level since December 2008, the data
showed.

–Frankfurt newsroom, +49-69-720-142; jtreeck@marketnews.com

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