FRANKFURT (MNI) – There are indications that the Eurozone economic
slowdown that had been expected potentially to worsen is subsiding
instead, European Central Bank Chief Economist Peter Praet said in an
interview pre-released Tuesday.

Praet told the German daily Frankfurt Allgemeine Zeitung that he
didn’t expect a long phase of weakness in the euro area even if last
quarter and the current one would only show feeble growth.

He refused to pre-commit to more rate cuts and noted that credit
conditions are already quite good in some parts of the area.

“There are signs that the speed of the downturn is waning and a
stabilization is gradually taking place,” Praet said. “In December an
acceleration of the downturn had still been feared. Credit conditions,
however, remain difficult in some sectors.”

Last quarter and the present one will presumably be “very weak,” he
said, citing the various risks to growth such as the banking crisis, the
sovereign debt crisis and oil prices.

Asked if further rate cuts might be in the offing, Praet reminded
that the ECB never pre-commits and observed that the flight to safety
had led to very low interest rates on German government bonds.

“As a result, credit conditions in some parts of the Eurozone are
already very, very favorable,” he argued.

Still, he said, the ECB’s expectation of further economic weakening
in the winter quarters is based in part on the tense credit conditions
for major parts of the economy. ECB intervention has prevented a worse
situation, he said, “but in a whole series of countries, the credit
supply via the banks is still tight.”

As is not the case with economic growth, inflation developments
across the euro area are relatively homogeneous, Praet said. He
attributed this to “firmly anchored” inflation expectations.

The high uncertainty of the current environment has led to a
reduction of the money supply multiplier, he said. This is an important
point for the ECB, he added.

Praet said the ECB had to be cautious about expanding its
collateral framework further, even if “we naturally are hearing that the
banks would like still more.” The measures taken so far must be
implemented and false incentives avoided, he said.

A boosting of the EFSF’s size is mainly for politicians to decide,
he said. “Decisive in my view is that the EFSF becomes functional as
quickly as possible,” he urged. “Then we can see how effectively it
works.”

Asked if the ECB could forego buying government bonds, Praet said
that it was up to governments to restore market confidence via an
effective stabilization fund and “above all via credible reforms.”

A Greek default would be dangerous for the financial markets, he
said. If the proper measures are taken and reforms implemented, the
program Greece is now in can work, he argued.

As to whether the ECB would still accept Greek bonds as collateral
in the event of a default resulting from the creditors being
contractually obliged to accept losses, Praet replied, “There are ways
of dealing with this problem.”

An increase in capital for the ECB and the national central banks
is not currently on the agenda, he said, noting that the ECB’s capital
was increased only last year.

For less competitive countries to abandon the euro “is not an
option at all,” he said.

–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com

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