–Updates MNI Mainwire Story From 0955 ET/1355 GMT

FRANKFURT (MNI) – The time is never right to withdraw central bank
liquidity, European Central Bank Executive Board member Peter Praet said
Wednesday, arguing the ECB will have to rely on good information about
the state of the financial system when the time comes.

Speaking on a panel at a Bundesbank conference here, Praet said
money growth is “obviously subdued” in the Eurozone and argued
that exiting from the current European debt crisis was not only the task
of the ECB.

“At the end of the day … societies have to adjust, there is no
monetary solution,” Praet said.

Praet said part of the ECB’s goal was to “try to put some of the
burden on the other institutions” to solve the crisis for good
and explained that it was in the ECB’s own “self-interest” to push for
more fiscal consolidation from EMU members.

“I would like the other institutions to be better managed,” Praet
said. “That’s why we are also very active in trying to strengthen the
other parts.”

Praet acknowledged that the timing of an ECB exit from the crisis
will be a tough decision: “The time is never right to withdraw
liquidity.”

“You have to have the information,” Praet said, to judge when the
financial system will have normalized enough to handle the withdrawal of
central bank liquidity.

Praet also said it was critical for a central bank to find the
“right balance” between necessary crisis-fighting actions and the risk
of “moral hazard” from providing too much liquidity.

Asked later by reporters if there were any current distortions seen
as a result of the ECB’s liquidity provision, he said “No” and paused,
before adding: “I think that it’s very important for the central bank to
closely monitor.”

In a speech before the conference, Praet acknowledged there can
come point when financial firms become addicted to central bank
liquidity, making it critical to keep an eye on the amount of liquidity
a central bank is providing.

Praet said the distribution of liquidity typically doesn’t matter
for a central bank but can become problematic if additional financing
for a bank – or government – “influences the incentives in terms of
solvency conditions.”

There can come a point “where banks getting liquidity at some point
become too addicted to the liquidity they get from the central bank and
mismatch their own liquidity management. So, I say, the quantity is a
very crucial thing in the management,” Praet said.

— Frankfurt bureau: +49 69 720 142; email: ccermak@mni-news.com —

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