TRICHET TEXT: Trichet’s intro to EU Commission

Author: Market News International | Category: News

The following is the verbatim text of European Central Bank
President Jean-Claude Trichet’s introductory remarks prepared for the
European Parliament debate on “Monetary and economic policy issues
raised by the current situation in the sovereign debt markets,” in

“Thank you very much for the invitation to the exchange of views
today. You asked me to begin with a brief overview of the main recent
economic and monetary developments in the euro area and recent monetary
policy decisions.

Incoming information since our last regular hearing in June
continue to point towards ongoing growth in the euro area, although as
expected, at a slower pace. After a strong increase of 0.8% q/q in 1Q of
2011, partly due to special factors, real GDP growth decelerated to 0.2%
q/q in 2Q.

Looking ahead, we continue to see the euro area economy growing at
a modest pace in a context of overall relatively sound economic
fundamentals for the euro area as a whole. At the same time, not least
because of the recently re-emerged tensions in financial markets,
uncertainty remains particularly high. This mainly relates to ongoing
fiscal and economic adjustment in a number of euro area countries and
most other advanced economies, as well as the overall outlook for the
global economy. In particular, the United States has been facing both
fiscal and structural headwinds amidst weakened economic prospects.

Inflation in the euro area has remained elevated for some months,
mainly driven by commodity prices. We expect to see inflation still
above 2% over the months ahead. Risks to the medium-term outlook for
price developments are under study in the context of the ECB staff
projections that will be released early September.

Our monetary analysis indicates that the underlying pace of
monetary expansion remains moderate but monetary liquidity remains
ample, with the potential to accommodate price pressures. At the same
time, monetary liquidity is likely to be held more for precautionary
reasons rather than for spending purposes.

The Governing Council of the ECB is determined to ensure that
inflation expectations continue to be firmly anchored in line with our
aim of keeping inflation rates below, but close to, 2% over the medium
term. II. Recent measures taken in response to the intensification of
the crisis early August

Let me turn to our response to the deterioration in financial
markets in the second half of July and early August in the euro area and
elsewhere. Notably, in the euro area the renewed intensification of
financial market turbulence led to very high interest rates, potentially
damaging volatility and very low trading volumes in some government bond
markets that at times ceased to function appropriately. The tensions to
some extent resembled those observed in May 2010, but in some aspects
they were more broad-based than what we had seen at that time.

In view of these developments, the ECB decided earlier this month
to continue conducting its refinancing operations as fixed-rate tender
procedures with full allotment, at least until mid-January 2012. “Full
allotment” means that the Eurosystem fulfils, against collateral, in
full the liquidity demands by any participating bank in our refinancing
operations. Currently, the outstanding Eurosystem credit in our
refinancing operations amounts to about E530 billion, which is provided
in operations ranging from 1 week to 6 months. We decided in early
August to conduct one refinancing operation with a maturity of
approximately six months to help banks in their liquidity planning, and
enhance support for their lending to households and corporations.
Currently about 470 banks participate as counterparts in our refinancing
operations; and over 6,000 banks are potentially eligible. The total
value of marketable securities eligible for Eurosystem credit operations
is about E14,000 billion (as of 31 December 2010; source: ECB Annual
Report). Therefore, there is no liquidity or collateral shortage for the
European banking system.

The ECB resumed government bond market interventions within its
Securities Markets Programme (SMP) in August. Via its securities
interventions, the ECB Governing Council aims at helping to restore a
more appropriate transmission of its monetary policy stance in an
environment in which some market segments are dysfunctional. The
interventions do not influence our monetary policy stance. In order to
sterilise the impact of these interventions on the liquidity conditions
in the banking system, we re-absorb the liquidity injected.

On the broader context of this programme, let me quote what I said
in May 2010 [1]: “Our actions are in full compliance with the
prohibition of monetary financing and thus with our financial
independence. The Treaty prohibits the direct purchase by the ECB of
debt instruments from governments. We are buying bonds on the secondary
market only, and we stick to the principles of the Treaty, which are
price stability, our primary mandate, and central bank independence. We
expect from governments strict respect for the principle of budgetary
discipline and effective mutual surveillance.

The purchases made on the secondary market cannot be used to
circumvent the fundamental principle of budgetary discipline. The
Securities Markets Programme strictly aims at correcting malfunctioning
of markets.

The prohibition of monetary financing underlines precisely the fact
that budgetary discipline is of the utmost importance. We have taken
note of the precise additional commitments taken by some euro area
governments to accelerate fiscal consolidation and to ensure the
sustainability of their public finances.” I have nothing to withdraw
from these remarks of May 2010. They remain fully valid.

We expect from governments strict respect for the principle of
budgetary discipline and effective mutual surveillance. It is of utmost
importance that these commitments are now implemented strictly and
timely. They need to be backed by concrete measures. This applies to
both the IMF/EU adjustment programmes and the renewed commitment of all
euro area governments to the agreed fiscal targets. The full and timely
implementation of the 21 July agreement between Heads of State or
Government is of essence in this respect.

While a special arrangement for Greece has been launched, the
inflexible determination of all other euro area governments to fully
honour their own individual sovereign signature is key in returning to
sustainable and healthy public finances and contribute to stable market

Thank you for your attention.

— Frankfurt bureau: +49 69 720 142; email:

[TOPICS: MFX$$$,M$X$$$,MGX$$$,M$XD$$,M$$EC$,M$XDS$]

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