ECB blanks Ireland fears to keep eyes on exit path

By Marc Jones and Paul Carrel

FRANKFURT/BERLIN (BestGrowthStock) – European Central Bank policymakers brushed off the rebound in debt market tensions on Thursday, saying the bank’s plans to scale back its crisis support remained unaffected by the ongoing turmoil.

The ECB will say next Thursday how much of its crisis support –mostly ultra-easy loans for banks– will remain in place beyond mid-January.

Analysts continue to expect it will limit its three-month lending but doubts have crept in as debt market tensions engulf Ireland and other high-debt euro zone members refuse to go away.

“The (euro zone) banks are much more stable and able to get their own funding. They are relying less on the European Central Bank. This is an important message,” ECB Executive Board member Gertrude Tumpel-Gugerell said in an interview published on Thursday.

The premium investors demand to hold Irish debt climbed back to just shy of a record high on Thursday as Ireland’s plans to cut its debt were overshadowed by doubts over the weakened government’s ability to see the measures through.

Speaking to reporters in Hamburg, ECB Vice President Vitor Constancio also bolstered expectations the ECB will press ahead with its exit plans amid the ongoing problems.

Asked whether the Ireland crisis would impact the ECB’s exit strategy, he said: “The two things are not connected of course. Monetary policy is decided in terms of the overall situation of the euro area.”

Yves Mersch struck a similar tone on Wednesday. “We only can welcome that now that we have a program that will lead to stability in Ireland, this will allow us to continue on our gradual and prudent exit strategy.”

“I would not take issue with the expectations that are presently in the market,” he said.

PENALTY KICK

Money markets remain at the heart of the ECB’s efforts to fight off the financial crisis.

It is becoming increasingly impatient with banks reliant on its crisis loans. As long as it has unlimited cash on offer to prop them up it cannot control the key money market rates that relay its core interest rate policy.

There was a fresh blow on Thursday when European clearing house LCH.Clearnet hiked the margin requirement it imposes on Irish sovereign debt for the third time this month to an eye-watering 45 percent.

The move is likely to complicate the ECB’s attempt to wean weaker banks off its liquidity life support. Higher collateral requirements at clearing houses push funding-hungry banks back in the direction of the ECB.

ECB data suggests money markets are tensing up again. Demand for three-month ECB loans was higher than expected on Wednesday while use of its emergency overnight lending facility has been consistently elevated for the last week.

Trading in overnight markets has also dropped by about a third in the last month as rate volatility has returned.

CENTRAL BANK DIVERGENCE

As well as announcing plans for its support measures next week, the ECB’s in-house economists will publish a new set of growth and inflation forecasts.

Tumpel-Gugerell said euro zone growth had topped expectations in recent months and pointed to increased optimism in economic surveys.

She also stressed the difference in policy direction between the ECB and its U.S. counterpart the Federal Reserve.

“Each central bank has to take measures it sees as adequate,” Tumpel-Gugerell said, referring to the Fed’s move this month to pump an additional $600 into the U.S. economy.

“We (ECB) are in a period where we don’t think we would need additional measures.”

Speaking in Bratislava, Slovakia’s ECB Governing Council member, Klaus Makuch, played down Ireland’s troubles and the recent slump in the euro.

“The Irish issue is not pleasant, but it can be solved,” Makuch told a business conference. “The euro is slightly overvalued, no drama, it hit a two-month low,” he added.

Influential ECB policymaker Axel Weber also sought to calm fears Ireland’s problems could spread into Portugal and Spain.

“It is very unlikely that Spain will need help,” Weber said at an event in Berlin, also stressing that Portugal’s problems were of a different type to Ireland’s banking sector woes.

Weber said on Wednesday he expected the euro to survive the current turmoil, while he believed euro zone states could come up with more money in the unlikely event the bloc’s existing 750 billion euro safety net ever proved insufficient.

(Reporting by Marc Jones; Editing by Catherine Evans)

ECB blanks Ireland fears to keep eyes on exit path