Bloomberg News

Constancio Says ECB Three-Year Loans May Get Significant Demand

December 28, 2011

(For more on Europe’s debt crisis, see EXT4.)

Dec. 20 (Bloomberg) -- European Central Bank Vice President Vitor Constancio predicted “significant” demand for three-year loans that the institution will make tomorrow to keep credit flowing during the debt crisis.

“I cannot put a figure to it, but I would think that it would be significant,” Constancio told Bloomberg Television in an interview in Frankfurt yesterday. “It’s an important instrument for banks. They face very high refinancing needs early next year related to the repayment of medium-term debt.”

The ECB will offer banks unlimited cash for three years at its benchmark rate of 1 percent to encourage lending and stave off a credit crunch. It has also loosened rules on the collateral banks can use to obtain the loans so that they can borrow more.

“These measures should ensure that banks continue to have access to stable funding, also at longer maturities, which gives them the opportunity to continue lending to firms and households,” ECB President Mario Draghi told the European Parliament in Brussels yesterday.

Constancio spoke after presenting the ECB’s twice-yearly Financial Stability Review, which says euro-area governments must swiftly implement the reforms they agreed to at a Dec. 9 summit to mitigate the risk of the debt crisis spreading. Draghi told lawmakers that the agreement has received less recognition from investors than it deserves, and it was unrealistic to expect a “silver bullet.”

Default Probability

Constancio said ECB analysis showed the probability of a simultaneous default by two or more large euro-area banks within one year has risen to about 25 percent from 15 percent in June.

Banks from the euro region need to refinance 35 percent more debt in 2012 than they did this year, according to the Bank of England. Lenders have more than 600 billion euros ($808 billion) of debt maturing next year, around three quarters of which is unsecured, according to the study.

The ECB’s loans will ensure that banks “cannot use the excuse of not having funding or liquidity to embark into a more significant deleveraging or a credit crunch,” Constancio said.

It’s not the ECB’s intention that banks use the three-year loans to buy sovereign bonds, rather that they are able to refinance themselves for the medium term, he said.

Asked if the ECB could step up its bond buying if needed to ease market tensions, Constancio said the ECB never pre-commits and the purchase program is “ongoing,” though “nothing on earth is eternal or infinite.”

Treaty Rules

Draghi made the same point in his testimony, saying that the ECB cannot go beyond the remit set out in the European Union treaty because that would affect the institution’s credibility.

Asked if further interest-rate cuts are an option, Constancio said the ECB has shown it will do what’s needed as the situation evolves. The central bank reduced its key rate for a second consecutive month in December.

“I don’t comment on what may be our future policy, but I think that by now everyone in the market has concluded that, as we have done several times, we really do what we consider necessary, face the situation as it evolves,” Constancio said.

While the ECB’s baseline scenario is for “moderate, positive growth throughout next year,” Constancio said that “deflationary probabilities” would increase if there were another recession. “But I don’t see really a possibility of deflation.”

--With assistance from Gavin Finch in London. Editors: Jeffrey Donovan, Jones Hayden

To contact the reporter on this story: Matthew Brockett in Frankfurt at mbrockett1@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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