Bloomberg News

ECB Won’t Tolerate Lehman Rerun, Bank of Finland Deputy Says

October 17, 2011

(Updates with Roubini comments in 11th paragraph.)

Oct. 17 (Bloomberg) -- The European Central Bank won’t allow interbank markets to freeze as they did after the 2008 collapse of Lehman Brothers Holdings Inc. and stands ready to step up liquidity measures, Bank of Finland Deputy Head Pentti Hakkarainen said.

“When a credit crunch is perceived to be coming, measures will be taken to stop it, such as strengthening banks’ capital and maintaining the ability to transmit funding,” the deputy to Governor and ECB Council member Erkki Liikanen said in an interview in Helsinki. “The goal of course is to prevent it.”

As Europe’s sovereign debt crisis threatens to engulf the region’s banks, policy makers are groping for responses to avert a rerun of the global liquidity freeze that followed Lehman’s collapse. The Frankfurt-based ECB said this month it will reintroduce yearlong loans, giving banks access to unlimited cash through January 2013. The bank has secured extra dollar liquidity as part of a range of measures aimed at preventing a potential market seizure.

“The heat’s rising on the thermometer,” said, Hakkarainen, who oversees financial markets at the Finnish central bank. Even so, “we’re not at the Lehman levels. Markets have confidence that a solvent financial institution can get sufficient funding from the central bank against suitable collateral.”

The Sept. 15, 2008, collapse of Lehman sent the Standard & Poor’s 500 Index plunging 43 percent through a trough in March in the following year. Financial institutions lost or wrote off close to $1 trillion. The credit event set the global economy lurching into a crisis from which it has yet to emerge.

Creating Confidence

Three years on, the ECB’s measures “create confidence in the market that the situation won’t freeze as badly as after Lehman,” Hakkarainen said.

The bank’s facilities, which include purchases of covered bonds, “will continue to ensure that euro-area banks are not constrained on the liquidity side,” the ECB said on Oct. 13. Europe’s banks know they have the ECB to fall back on as a guarantor for liquidity, Hakkarainen said.

“When the money is in the central bank, you can always access it,” he said. “When the interbank market freezes, it may be difficult to get your money from the counterparty, no matter how great they are. The ECB, in this regard, is always a sure bet.”

Market Rates

The difference between the 12-month secured Eurepo and same maturity unsecured Euribor rates that banks charge each other was at 149 basis points on Oct. 14, or 81 basis points lower than its high of 230 basis points on Oct. 31, 2008. The spread was at a post-Lehman high of 164 basis points on Sept. 26. One basis point is 0.01 percentage points.

According to Nouriel Roubini, chairman and co-founder of Roubini Global Economics LLC, European efforts to come up with a plan to recapitalize the region’s banks are “behind the curve,” he said at a speech in Helsinki today. The problems in the euro area “are chronic” and “won’t go away,” he said.

He warned that a disorderly default by a nation in the euro area, or a member’s exit from the currency bloc, could trigger a shock of “Lehman magnitude” that would “reverberate through the global economy.”

The euro lost as much as 1 percent against the dollar before trading 0.9 percent lower at 1.3764 as of 3:58 p.m. in London.

One Week

European officials have one week to settle differences and flesh out a strategy to get to grips with the turmoil, which has propelled Greece to the brink of default, shaken world markets and fueled speculation that the euro might not survive in its current form.

Group of 20 finance ministers and central banks concluded weekend talks in Paris endorsing parts of the emerging plan to avoid a Greek default, bolster banks and curb contagion. They set an Oct. 23 summit of European leaders in Brussels as the deadline for it to be delivered.

Policy makers are alert to the prospect of less liquidity, Hakkarainen said.

Hakkarainen, 53, is running for a third term on the board of the 200-year-old central bank. Bank of Finland board members have five-year terms, while Governor Liikanen is serving his second seven-year term.

--Editors: Tasneem Brogger, Jonas Bergman

To contact the reporter on this story: Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net


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