–Nowotny Says Now Is Not The Time For More Restrictive ECB Measures

VIENNA (MNI) – European Central Bank Executive Board member and
chief economist Peter Praet said Thursday that he “is not seeing a loss
of confidence” in the euro on the part of investors outside the
Eurozone.

“We have seen a remarkable stability of external values of
currencies like the Euro or U.S. [dollar] during these shocks,” he told
delegates at an economics conference at the Austrian national bank here
today.

“I know that in the U.S. and elsewhere a lot of investors have
burned their fingers because they expected a weakening of the system,”
Praet said.

On worries about the expansion of central banks’ balance sheets, he
stressed “it is important to [distinguish] between base money and money
supply, as base money is feeding into the system.”

He added that over the last months, especially in October and
November of last year, the “transmission from base money to money has
been impaired.”

According to Praet there are “different techniques for dealing with
that.” The U.S. Federal Reserve reacted in its own way, while “our
policy [which] we feel more comfortable with is repo-based even if it is
longer-term repo based,” he noted, referring to the ECB’s three-year
LTROs.

Austrian National Bank chief and ECB Governing Council member Ewald
Nowotny, who hosted the conference, explained that in comparing the U.S.
Fed and the ECB balance sheets, one has to be aware that “in the
Eurosystem the gold component is included,” and “if you take that out
the ECB made smaller payouts than the Fed even though the ECB balance
sheet was still expanding.”

“In general, our risks and balance sheets have increased but a
central bank is not a commercial bank. There are many instances where it
is exactly the function of a central bank to take on market risks,”
Nowotny said.

He added that “whenever we do take a new action, at the same time
we have a discussion at the ECB on how to end it” and that “the exit
option is also always on our mind.”

“When the need comes, we do have an arsenal also to be active on
the restrictive side. We do have a number of possibilities for the
restrictive side – but now is not the time for that, and the markets
need to be aware of that and they are aware of that,” Nowotny said.

Praet noted that for the ECB the most important thing was to “have
all the information, the operational preparedness and the willingness to
take measures at the right times”.

He said the ECB did have “the willingness to take measures” and he
said he was “confident about it.” However, “the key question is not the
operational side but to get good information on when to do it.”

“We have to get more access to information on financial
institutions and we have to understand institutions better from a
bottom-up perspective,” Praet said.

He added that “you can debate whether it is better for the banking
sector to restructure or not,” and that “looking at [European Banking
Authority]…many countries will say it is not enough.” But “the
direction is very clear to me and it is happening,” he added.

Where Praet sees a “slow development” is in the sector of banking
supervision: “I think it’s a bit slow and the integration of supervision
of the banking system is something that has to happen,” he said.

He added: “I can understand why you cannot go from one regime to
the other – there are huge implications if things go wrong.”

“For rational reasons national supervisors might want to ringfence
liquidity and these things have to be addressed; we are very conscious
of that – yet we are trying not to be too restrictive,” he said.

As a lesson learned from the crisis, Praet noted: “We found that
memorandums of understanding, MOUs, are not sufficient because there is
so much money involved that you have to be very conscious of that and
you cannot rely on fuzzy, soft contracts.”

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