SOPOT, Poland (MNI) – It is still too soon to gauge the effect of
the European Central Bank’s long-term refinancing operations (LTROs),
although data so far indicate that they helped avert a major credit
crunch, ECB Executive Board member Joerg Asmussen said Thursday.

According to the text of remarks to be delivered at a financial
conference here, Asmussen said the key outcome from Wednesday’s dinner
meeting of EU leaders in Brussels was their expressed commitment to a
reinforced EMU. Moreover, participants agreed on the complementary
nature of growth and austerity, he said.

Asmussen promised that the ECB would withdraw any excess liquidity
if it perceived a materialization of inflationary risks, but he said
that under current conditions the liquidity was not a threat and
insisted that Eurozone monetary authorities remained committed to their

“Any assessment of the impact of the LTROs on the real economy
would be premature at this stage,” Asmussen said. “It is true that bank
lending to the private sector is still very much subdued. But the data
up to March confirm that the LTROs have reduced deleveraging pressures
for banks and helped to avoid a major credit crunch in the euro area.”

Although large injections of central bank liquidity could
theoretically spark inflation, the conditions under which that would
happen are “clearly not met at the moment,” he argued. Those conditions
would have to include “a massive rise in firms’ demand for credit”
combined with “an equally massive increase in banks’ capacity and
willingness to supply credit,” he said.

The LTROs are thus completely consistent with ensuring price
stability, Asmussen asserted.

“We constantly monitor the developments of credit and money in the
euro area,” Asmussen said. “If inflationary risks were to emerge, we
would take the necessary action to prevent these risks from
materialising and withdraw any excess liquidity.”

The ECB measures monetary liquidity by looking at the balance
sheets of the area’s banking sector, and the signals they provide
indicate that money and credit growth is still “very subdued,” he said.

“There is no reason to question our commitment to price stability,”
Asmussen declared, citing the findings of the ECB’s latest Survey of
Professional Forecasters, according to which inflation would rise to
2.3% this year before weakening to near or just under 2% up to 2016.

Asmussen assured his audience that the collateral framework applied
by some national central banks to banks wanting liquidity from the LTROs
includes “appropriate haircuts, often very high” on all credit claims
offered as security against the loans.

“Any discretion on the part of national central banks is limited,”
he said. “The ECB constantly monitors all related risks.”

As for last night’s EU summit in Brussels, Asmussen said the most
significant outcome was “that leaders showed their commitment to move
the economic and monetary union to a new stage.” His comments echoed
those of ECB President Mario Draghi, who made the same point in remarks
shortly after the summit ended in the pre-dawn hours of Thursday

All leaders felt that efforts toward fiscal sustainability and
measures to enhance growth needed to go hand in hand, he said.

“Fiscal consolidation is not an end in itself,” Asmussen said.
“Rather, it is a pre-condition for achieving sustainable growth. Fiscal
consolidation creates the confidence that investors and consumers need.
Ultimately, it supports both economic growth and employment. The only
alternative would be to fight debt with more debt. This is no solution.”

Asmussen pointed to progress in the fiscal arena, predicting by way
of example that France would hit its deficit-to-GDP target of 3% in

He warned against “flash-in-the-pan” spending programs and urged
instead that ways be found to boost potential growth. The appropriate
approach would include product and service market reforms, labor market
reforms and funding of growth initiatives, he said.

A good strategy is still lacking in the area of financial markets,
Asmussen lamented. He singled out the need to address negative feedback
loops between banks and national governments, in which a government’s
fiscal position can be weakened by recapitalizing ailing banks, thus
harming the banks further via their sovereign bond holdings.

“This feedback loop has to be stopped,” he said. “We have to move
closer to a financial markets’ union. A European bank resolution
authority and a European deposit insurance scheme are two elements that
could be used to address the nexus between sovereigns and banks.”

–Frankfurt bureau tel.: +49-69-720142. Email:

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