–BOE FPC Cohrs: UK Banks V Vulnerable In Event EZ Default

LONDON (MNI) – The European Central Bank’s moves to pump liquidity
into the euro area are buying time and easing immediate financial
pressures, but the challenge is to tackle fundamental weaknesses, Bank
of England Governor Mervyn King told the Treasury Select Committee.

King said central banks have already bought time to try and allow
economic problems to be resolved, but it was hard to say any of this
time had been used productively. He warned that growth in emerging
market economies were slowing, and it would be a challenge to see
sustainable growth in 2012.

Asked about the latest development in the euro area, King took some
encouragement from the markets subdued response to the recent sovereign
ratings downgrades and the ECB’s actions.

“Within Europe there is a particular challenge, clearly. The
European Central Bank, with the operations it announced just before
Christmas, I think has gone a long way to try to ease some of the
immediate financial pressures in the euro area,” he said.

The ECB, however, cannot provide a panacea for the euro area’s
woes.

“The European Central Bank can’t, on its own, change the underlying
problems which are a challenge to the euro area, which are a loss of
competitiveness, current account deficits that have, by the laws of
arithmetic, to be financed,” King said.

“Those are the underlying challenges. Creating yet another
liquidity facility buys more time. But we have bought a lot of time over
the last two years. It is hard to argue that the time that was bought
has been used productively,” he added.

The BOE head said policymakers globally were focussed on trying to
get back to sustainable growth.

The drive “is to move to a position where we get back to steady
growth and 2012 will pose a challenge in that respect as some of big,
emerging market economies are slowing down,” he said.

King added his voice to the chorus of central bankers expressing
skepticism about the role and relevance of the credit rating agencies.
He said people should pay more attention to market pricing of sovereign
debt than to anything the rating agencies do or say.

It is better “to put less focus directly on what the rating
agencies say and more on what the market as a whole is saying in terms
of sovereign debt,” he said.

He warned against ignoring signals from market pricing, but was
supportive of criticism of the rating agencies.

“It is one thing to say the rating agencies are just reacting,
trying to make up for the mistakes of the past, it is another to ignore
the message from the market that the yield on government debt has moved
to very high levels,” King said.

“That (market pricing of sovereign debt) is something we should
focus on much more than the actual, official rating,” he added.

The BOE officials stressed that UK banks are now in a much
healthier position than in 2008 and were in a more robust state than
those of the euro zone.

However, BOE FPC Member Michael Cohrs said that UK banks would be
“very vulnerable” in the event of a default by euro zone countries.

BOE Executive Director Financial Stability Andrew Haldane said that
the exposure of UK banks was to French and German banks which themselves
might be more directly exposed to the more troubled economies of
the euro zone.

–London newsroom 0044 20 7862 7491; email: drobinson@marketnews.com

[TOPICS: M$B$$$,M$$BE$]