BRUSSELS (MNI) – The current situation in foreign exchange markets
cannot be aptly described as a currency war, European Central Bank Vice
President Vitor Constancio said Wednesday.

“I would not characterize the situation as a currency war,” he said
on the sidelines of the Eurofi conference here. “We are in a situation
which is of course quite different. We have seen some volatility. But
volatility in exchange rates has been with us…forever, so I don’t see
that we can really designate the situation as” a currency war.

Constancio: continued: “The evolution of the euro exchange rate we
don’t comment [on]…It’s not a target for our policy. We are in a
floating currency world and we respect that. And we think that the major
currencies should also behave in respecting that system that we have.”

He said that the ECB is monitoring “very, very closely” the recent
sharp widening of sovereign spreads. “But I don’t think the situation is
really as acute as it was in May.”

“Perhaps” markets are overreacting, Constancio said, though “of
course there are uncertainties regarding further adjustments in those
countries.” They must therefore ensure clarity on the steps they are
taking to restore market confidence, he added.

Asked about the recent Japanese intervention to stem the yen’s
rise, Constancio declined to comment. He also avoided commenting on
whether he supports the idea of a cap on the amount individual banks can
borrow in ECB liquidity operations.

“The liquidity management has been evolving in the right
direction,” he said. “There has been a decrease in total liquidity
provision since June, since the repayment of the big one-year operation,
and we have seen improvements in the overnight markets with more volumes
and so on. And…liquidity provision continues to gradually be reduced,
so we don’t see in general, as regards management of total liquidity, a
problem.”

However, that does not mean money markets are back to normal, he
stressed. “What I’m saying is that it’s been gradually normalizing…
But of course we are not yet in a situation of full normalization of the
money markets.”

Asked whether he expects overall liquidity in the system to decline
with the expiry of the final one-year tender this week, he replied, “I
think it will go in broadly the same direction as has been the case up
to now.”

As to the next liquidity exit move by the ECB, Constancio said: “We
never precommit and we never announce beforehand what we are going to
do.” Pressed on whether the next move would occur before 1Q, he said: “I
won’t really commit on any…timetable. We began the exit a long time
ago, when we eliminated one-year and six-month operations and other
measures that we took. And then we [took] a pause, but the objective is
to go back to normal operations, of course, when we consider that the
situation in the money markets is normalized.”

On the global economy, Constancio acknowledged that there have been
“concerns” lately with respect to economic developments in some
countries, “starting with the U.S., which is very important for the
world economy,” he said.

“There are also some problems in a few European countries, but
overall, indicators for the third quarter show that we will have
positive growth — not, of course, at the same pace as in the second
quarter — but that the sort of projections that have been published are
on track to be realized this year.”

Constancio reminded that “we at the ECB have been proposing that
the rules must be strengthened in order to avoid episodes like the
sovereign debt situation that we have been witnessing, and so we will
support all the new measures that can really strengthen and give teeth
to the Stability and Growth Pact.”

In other comments, he remarked that “the situation is such, as we
all know, that markets have been putting pressure on sovereign debt and
a response must be given to that in order to ensure the financing of the
national economies, which means that in particular in some cases, in
some countries, further fiscal consolidation became unavoidable in view
of the situation.”

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

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