VIENNA (MNI) – The non-renewal of the ECB’s one-year bank tender is
part of a long-term exit strategy and will not dry up liquidity in the
interbank market, European Central Bank Governing Council member Ewald
Nowotny said on Tuesday.

“Of course in the meantime there have been special actions taken,
but the basic strategy of a long-term exit strategy is valid,” the
president of the Austrian central bank said at a conference here.

The ending of the 12-month tender is accompanied with a number of
measures to make sure that there is “no liquidity squeeze,” Nowotny
said.

On Thursday, banks must pay back to the ECB the E442 billion they
borrowed in a one-year refinancing operation last June. While the ECB
has made arrangements for shorter rollovers of the money in three-month
tenders with full allotment — plus a six-day fine tuning operation —
it has thus far refused to conduct another 1-year operation.

The approaching expiry of the 1-year LTRO hit sovereign bond
markets last week as banks sold off government debt holdings in
preparation for paying back the ECB — and amid nervousness that banks
in the peripheral countries whose debt is already under pressure may
have a particularly hard time making the reimbursement. The Financial
Times reported Tuesday that banks in Spain were in a “rage” over the
ECB’s policy of not renewing the 1-year LTRO.

“We have to expect a lot of nervousness in bond markets this week,”
Nowotny said. “Rating agencies downgraded Greece, which was very strange
because it totally ignores the progress that is being made by Greece.”

“But this is a very specific situation,” he added. “This is no
indicator for long-term developments.”

The central banker urged Austria to begin fiscal consolidation “the
sooner the better,” while foreign demand for its exports is still
strong.

“The chance should be used as quickly as possible to begin with
budget consolidation,” he said. “We have at the moment the good fortune
that in the export markets there is a very strong, dynamic development.”

“That means that the employment risk of consolidation is lessened,”
he added.

Moreover, eastern Europe could re-emerge as the economic motor of
Europe, he said. “We should use this chance to reduce the budget
deficit.”

The central banker said he saw now inflation dangers on the
horizon.

“Yes there are some risks” for Austrian banks in eastern Europe,
Nowotny conceded. “But we are aware of it. But the business model of
Austrian banks in this region, after crisis, will be and is to some
extent very different — less risky, more conservative.”

The involvement of Austrian banks in eastern Europe was a “success
story,” he said. “The business model for banks in the region must be
different than before the crisis. One must be more cautious and one must
differentiate between the different regions.”

Lending in foreign currencies to eastern Europe should be reduced,
he added. “In Austria, we’ve already done this.” He said that would be
a topic of concern for the new European Systemic Risk Board when it
begins operating next year.

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