By David Barwick

FRANKFURT (MNI) – European economic growth this year should exceed
1%, but wholesale and money markets remain a risk, European Central Bank
Executive Board member Jose Manuel Gonzalez-Paramo said in a newspaper
interview published Thursday.

Paramo told Peru’s El Comercio that “in the second quarter, growth
was very strong. It is expected that during the year it will be situated
at a rate above 1%…As a result of good performance in the second
quarter, growth figures have been revised upwards this year and a little
next year, but to levels below 2%.”

An element of systemic risk that Paramo identified is “excessive
financing in wholesale markets. In previous years the banks went from
being traditional (entities that take deposits and loan them out) to
being banks that finance the wholesale markets or money markets. If
those markets shut down, we will have a problem. These are risks about
which the Council will be vigilant.”

Other risks are related to the problem of too-big-to-fail
institutions, Gonzalez-Paramo said: “If the entity is too large and too
intwined with other institutions, its possible fall also brings big
problems. This is an issue that should be monitored.”

Asked about the state of lending to the private sector in Europe,
Paramo replied that loan growth is “on average at rates slightly above
1%,” but that “credit to households is evolving better, especially for
the purchase of houses, and at near-zero rates for loans to
enterprises.”

One must keep in mind that rates for the latter were negative until
just recently, he reminded.

Paramo called Latin America “a very important stability factor for
Europe because in some way it serves to compensate the losses or poor
situation that some European banking systems are suffering.”

Paramo voiced support for “early warning indicators” so as to
safeguard financial stability. “For example, analyzing what happened,
one can realize that excessive credit growth is behind all the financial
problems. When credit is growing in a very above-average way,
distortions arise in the system that are not immediately visible, but
there is a time when” the underlying problems become apparent.

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

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