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Trichet cautious on growth
ECB chief defends changes to capital requirements for banks.
The European Central Bank (ECB) today (5 August) sought to play down signs that the eurozone may be through the worst of the economic crisis, saying that it expects growth to slow in the second half of 2010. “We consider that we should not be complacent in any respect,” Jean-Claude Trichet, the ECB’s president, said. “We should not declare victory.”
Speaking after a meeting of the ECB’s governing council, Trichet said that the bank expects economic activity in the third and fourth quarters of 2010 to be “significantly less dynamic” than that recorded in the second quarter of the year (April-June). “The second quarter seems to be really exceptional,” he said. He urged governments to be rigorous in improving their public finances, saying this was an essential step to underpin recovery.
Eurostat, the EU’s statistical office, will release its first estimate of second-quarter growth in the EU and the eurozone on 13 August.
The governing council, the bank’s highest decision-making body, kept key ECB interest rates on hold for the 15th month running. The decision means that the bank’s main refinancing rate remains at 1%, a historic low.
CONFIDENCE REBOUNDING
Despite his cautious outlook, Trichet said that available data for the third quarter of 2010 indicates that growth will be “better” than previously expected. The European Commission’s latest economic forecast, dating from 5 May, predicts that the eurozone economy will grow by 0.2% in the third-quarter, compared to the previous quarter, and by 0.7% compared to the same period in 2009.
“Looking further ahead…we continue to expect the euro area economy to grow at a moderate and still uneven pace,” Trichet said.
The euro today hit a three-month high against the dollar of $1.3188 on the back of mounting investor confidence that Europe is through the worst of its sovereign debt crisis, which was sparked when markets became concerned that Greece, and other member states were not safe from default. Several of the EU’s benchmark stock indexes were also at three-month highs today.
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CAPITAL REQUIREMENTS
Trichet defended a decision on 26 July by the Basel Committee on Banking Supervision to amend planned reforms of capital requirements for banks – the minimum levels of capital that banks must hold to protect themselves against risk. The committee, which is made up of central bankers and financial regulators from the world’s major economies, agreed to relax rules on the kinds of assets that banks could use to build up ‘liquidity buffers’ to be drawn down in times of crisis. They also agreed to delay the introduction of a rule that would force banks to match more closely the duration of their liabilities and assets. Bank stocks rallied when the changes were announced, because they were widely perceived as a watering down of the committee’s original plans, published in December.
“I wouldn’t say at all that the discussions that took place in Basel have watered down in any respect future rules and regulation,” Trichet said. He said that a transition period before certain reforms were fully introduced was “natural in the present circumstances” and something that banks considered to be “important”.
Trichet said that further details on the timing and co-ordination of the reforms to capital requirements would be agreed at the Basel committee’s next meeting in September.
“After having been extremely negative on Europe and extremely positive on the US we are now observing some kind of a swing [by investors] in the other direction,” Trichet said.
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Steps taken by the EU to end the crisis have included the creation, on 7 June, of a €440 billion financial stability mechanism to help member states in difficulty, and the publication, on 23 June, of the results of a stress-test exercise of the EU’s banking sector.
Trichet said that the next meeting of the ECB’s governing council, on 2 September, would discuss the timetable for the bank to withdraw temporary measures that it has put in place to combat the financial crisis.