Europe's Top Banker Calls on Banks to Disclose Full Subprime Risk.
European Central Bank president Jean-Claude Trichet warned on Wednesday that the euro area's inflation surge was likely to last longer than expected -- a remark suggesting the bank will stick to its tough stance on interest rates even amid the subprime crisis.
Trichet repeated that the bank would even move to raise rates to ward off inflation if need be, saying the central bank would not hesitate "to do whatever necessary" to avoid second-round effects -- code for a wage-price spiral -- that would keep inflation high.
The ECB's stance to hold rates steady has been a sharp contrast to that of the U.S. Federal Reserve, which has already cut rates twice to try to ward off an economic slowdown from the subprime crisis.
Trichet said inflation was expected to remain significantly above 2 percent in the near future as oil and food prices remain high and would only calm down gradually next year. "The period of temporarily high inflation rates would be somewhat more protracted than previously expected," he said, mentioning ECB projections of a range of between 2 and 3 percent for next year.
His remarks appeared aimed at trade unions, particularly in Germany, that have been negotiating pay increases as companies turn record profits from recent high exports and good demand in Europe.
European economy officials are weighing up an uncertain future for the region as a growth spurt cools rapidly on worries that a credit crisis will make it harder for people to buy homes and companies to get loans. Instead of cutting rates, the ECB has been quick to provide extra short-term credit to make sure banks have the cash they need to operate in the current climate of fear.
The ECB on Tuesday opened its credit tap wide, pumping a record euro348.6 billion -- the equivalent of more than half a trillion dollars -- into money markets to keep banks from Finland to France flush with the cash they need to operate. The move, along with another liquidity infusion by the Bank of England, was aimed at keeping jittery markets calm amid a credit squeeze and appeared to calm stock markets.
Trichet said the ECB aimed at "minimizing the uncertainty" banks face at the end of the year and joint action with other central banks had been essential. "The new-year period is traditionally a period of scarce liquidity, as market activity is subdued and banks are preparing their year-end balance sheets," he said. "This absence of complacency is particularly necessary as regards financial stability." ECB actions to inject extra liquidity into the market since August had resulted in "very short-term rates close to the ECB's policy rate," he said.
The central bank is responsible for changing borrowing costs by raising or lowering interest rates in the 13 nations that use the euro. But it is currently caught between the need to encourage banks to lend money by cutting rates and acting to cool an overheating euro economy by raising them.
Year-on-year inflation in November rose to 3.1 percent, the fastest surge in six years as oil and food became more expensive. But that projection was based on the assumption that workers across the economy won't demand higher wages because that would trigger more price increases and European companies would see profits moderate after high returns this year.
Trichet warned that "stronger than currently expected wage dynamics may emerge" and nations with less open markets may see prices increase. He said it was important that banks be open about how much risk they face from complex investments in order to restore trust in the financial system, damaged by revelations that highly rated debt was in fact based on the risky U.S. subprime housing loan sector.
"It is crucial to promote a widespread consistent valuation of complex structured products as well as an adequate disclosure by banks of their exposures, in particular related to the U.S. sub-prime mortgage sector," ECB President Jean-Claude Trichet told the European Parliament's economic and monetary affairs committee.
European Central Bank president Jean-Claude Trichet warned on Wednesday that the euro area's inflation surge was likely to last longer than expected -- a remark suggesting the bank will stick to its tough stance on interest rates even amid the subprime crisis.
Trichet repeated that the bank would even move to raise rates to ward off inflation if need be, saying the central bank would not hesitate "to do whatever necessary" to avoid second-round effects -- code for a wage-price spiral -- that would keep inflation high.
The ECB's stance to hold rates steady has been a sharp contrast to that of the U.S. Federal Reserve, which has already cut rates twice to try to ward off an economic slowdown from the subprime crisis.
Trichet said inflation was expected to remain significantly above 2 percent in the near future as oil and food prices remain high and would only calm down gradually next year. "The period of temporarily high inflation rates would be somewhat more protracted than previously expected," he said, mentioning ECB projections of a range of between 2 and 3 percent for next year.
His remarks appeared aimed at trade unions, particularly in Germany, that have been negotiating pay increases as companies turn record profits from recent high exports and good demand in Europe.
European economy officials are weighing up an uncertain future for the region as a growth spurt cools rapidly on worries that a credit crisis will make it harder for people to buy homes and companies to get loans. Instead of cutting rates, the ECB has been quick to provide extra short-term credit to make sure banks have the cash they need to operate in the current climate of fear.
The ECB on Tuesday opened its credit tap wide, pumping a record euro348.6 billion -- the equivalent of more than half a trillion dollars -- into money markets to keep banks from Finland to France flush with the cash they need to operate. The move, along with another liquidity infusion by the Bank of England, was aimed at keeping jittery markets calm amid a credit squeeze and appeared to calm stock markets.
Trichet said the ECB aimed at "minimizing the uncertainty" banks face at the end of the year and joint action with other central banks had been essential. "The new-year period is traditionally a period of scarce liquidity, as market activity is subdued and banks are preparing their year-end balance sheets," he said. "This absence of complacency is particularly necessary as regards financial stability." ECB actions to inject extra liquidity into the market since August had resulted in "very short-term rates close to the ECB's policy rate," he said.
The central bank is responsible for changing borrowing costs by raising or lowering interest rates in the 13 nations that use the euro. But it is currently caught between the need to encourage banks to lend money by cutting rates and acting to cool an overheating euro economy by raising them.
Year-on-year inflation in November rose to 3.1 percent, the fastest surge in six years as oil and food became more expensive. But that projection was based on the assumption that workers across the economy won't demand higher wages because that would trigger more price increases and European companies would see profits moderate after high returns this year.
Trichet warned that "stronger than currently expected wage dynamics may emerge" and nations with less open markets may see prices increase. He said it was important that banks be open about how much risk they face from complex investments in order to restore trust in the financial system, damaged by revelations that highly rated debt was in fact based on the risky U.S. subprime housing loan sector.
"It is crucial to promote a widespread consistent valuation of complex structured products as well as an adequate disclosure by banks of their exposures, in particular related to the U.S. sub-prime mortgage sector," ECB President Jean-Claude Trichet told the European Parliament's economic and monetary affairs committee.
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