ECB says debt market tensions may delay exit plan

By Marc Jones

FRANKFURT, May 31 (BestGrowthStock) – Euro zone debt tensions may
have an impact on the speed at which the European Central Bank
scales back the ultra-easy lending operations brought in to help
banks through the financial crisis.

After Lehman Brothers collapsed in September 2008, the ECB
began offering euro zone banks unlimited, flat-rate loans in a
bid to calm nerves and keep lending flowing to the real economy.
This year it had started to cut back its support but has been
forced to do an about-turn by the region’s debt crisis.

In its latest financial stability report the ECB
acknowledged the problems could slow support withdrawal.

“Should the adverse effects of increased fiscal
sustainability concerns on the euro money market persist, they
might further affect the gradual phasing-out of the enhanced
credit support measures,” it said.

Tensions could emerge in mid-October when the ECB’s current
promise to lend banks unlimited cash runs out, it added. A
return to auction-based money market operations “could place
upward pressure on money market rates, and thus increase the
funding pressures for some banks.”

The ECB’s fixed-rate 3 and 6-month loans should support
credit flows to the economy and aid economic recovery, however,
although it was important to wean banks off their reliance on
ECB funding.

The report also warned that investors could get stung if
inflation created expectations of higher future interest rates.

“The fact that market participants see a yield curve
flattening scenario as most probable leaves them vulnerable
to a surprise steepening of the yield curve.” it said, adding
that present carry trade trends also carried risks.

The ongoing bond market troubles have numerous knock-on
effects for financial markets. The rise in government bond
spreads could drag up firms’ borrowing costs, hit banks and
attract a different breed of investor to bond markets.

“All in all, excessive public deficits and rising
debt-to-GDP ratios may pose upside risks for sovereign and
corporate bond yields in the euro area,” the report said.

(Reporting by Marc Jones; editing by Stephen Nisbet)

ECB says debt market tensions may delay exit plan