ECB would continue to provide emergency loans

Aug. 20, 2010, 9:47 a.m.

Emergency measures likely till year's end: Weber

Tone of remarks shows new side of hard-line Bundesbank chief, economists say

By William L. Watts, MarketWatch

LONDON (MarketWatch) -- The head of Germany's Bundesbank surprised economists and investors Friday, indicating in a television interview that the European Central Bank would continue to provide a range of emergency loans to euro-zone banks through the end of the year.

Bundesbank chief Axel Weber is a leading candidate to be the next president of the European Central Bank.

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"Most of these discussions about the continuation of the exit I think will be focused on the first quarter," Weber told Bloomberg Television in an interview broadcast Friday. "It's clear that we need to re-embark on a normalization procedure."

Jean-Claude Trichet, the current president of the European Central Bank whose term ends in October of next year, previously said its policy-setting Governing Council would discuss the further unwinding of extraordinary liquidity measures at its September meeting.

The euro /quotes/comstock/21o!x:seurusd (EURUSD 1.2705, -0.0114, -0.8893%) fell in the aftermath of Weber's remarks and changed hands in recent action at $1.2713, a loss of 0.7%.

German government bonds erased early losses, sending the yield on 10-year bunds to a record low near 2.23%, according to FactSet Research data. The yield was recently at 2.25%, down nearly 3 basis points from Thursday. The nearby bund futures contract on Eurex hit an all-time high for the second consecutive day and changed hands in recent action at 132.77, up 32 basis points.

The remarks were viewed as a surprise in light of Weber's reputation as an extremely hawkish -- or inflation-averse -- member of the Governing Council.

"Axel Weber's comments are clearly dovish and negative for the euro, as they indicate no further exit from the ECB before Q1 2011 at the earliest," said Lars Tranberg Rasmussen, economist at Danske Bank in Copenhagen. "This is a new Weber, who is running for the top job, so the uber-hawk has gone on vacation."

"I really get the impression that he's doing a good job in presenting himself as electable as the next ECB president, which raises concerns about how much he will keep his hawkish bias if he is the next ECB president," said Ulrich Leuchtmann, currency strategist at Commerzbank in Frankfurt.

The European Central Bank earlier this year began a slow withdrawal of the extraordinary measures put in place to shore up liquidity during the height of the credit crunch. It has ended a series of unlimited, one-year, fixed-rate loans.

But expectations that the central bank would continue phasing out a number of shorter-term measures were derailed as concerns over the euro-zone's sovereign-debt crisis deepened this spring.

The central bank currently meets all demand for collateralized seven-day, one-month and three-month refinancings. Its current timetable ensures the seven-day operations will continue until October, while three-month operations are set through the end of next month.

Reuters

Left to right: Trichet and Weber.

Weber said that six-month loans should be allowed to expire and that he doesn't favor adding to the current round of special operations.

Weber, seen as a potential successor to Trichet, openly criticized earlier this year the central bank's decision to begin purchases of distressed euro-zone sovereign bonds on the secondary market.

Weber's "relatively conciliatory tone [on emergency measures] presumably reflects the general view on the Council, as well as perhaps representing some positioning ahead of the determination next year of Mr. Trichet's successor as ECB president," said Julian Callow, chief European economist at Barclays Capital.

Rasmussen said Weber's remarks would reduce fears that money-market tensions could rise in the final months of the year and should serve to cap upside risk in money-market rates while possibly adding to the recent downward pressure seen on three-month rates.

The Bundesbank chief, meanwhile, downplayed a suggestion that diplomatic skills were necessary to helm the European Central Bank.

"It's important to be a diplomat for the diplomatic corps, it's not so important for a central bank," he told Bloomberg. Weber said it's "very important for central banks to be clearly focused and also, if necessary, to deliver undiplomatic messages to governments."

Weber, however, wouldn't comment on whether he was a candidate to succeed Trichet, saying he was focused on his job as head of the Bundesbank.

William L. Watts is a reporter for MarketWatch in London.