Trichet Urges Banks to Lend After Returning to Recovery `Path'

By Simon Kennedy and Anne-Sylvaine Chassany
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Oct. 20 (Bloomberg) -- European Central Bank President Jean- Claude Trichet urged banks to start lending again after policy makers put them on to the ``the path'' of recovery by pumping record amounts of cash into money markets.

``I expect the banks to normalize their relationships, meaning that they start lending to each other and that they lend to their clients,'' Trichet said in an interview on French radio RTL late yesterday. The banking system is ``on the path to normalization,'' he said.

The cost of borrowing dollars in London fell last week for the first week since July after the ECB offered lenders as many euros as they wanted and joined counterparts in promising unlimited dollars as well. Central bankers and governments have stepped up efforts to end the 14-month-old credit crunch that's threatening to tip the global economy into recession.

``We're facing a very important market correction which is lasting,'' Trichet said, declining to say the credit crunch is over. ``We are facing a very serious systemic liquidity crisis.''

As well as offering unlimited amounts of dollars and euros to banks, the ECB this month cut interest rates for the first time since 2003 and loosened rules on the collateral it will accept from banks when making loans. European governments including those in France, Germany and Spain committed 1.3 trillion euros ($1.7 trillion) to guarantee bank loans and take stakes in lenders.

Still, in a sign the crisis continues to reverberate, the Netherlands yesterday put 10 billion euros into ING Groep NV after the biggest Dutch financial-services company said it expects its first quarterly loss.

Lehman Collapse

Trichet said policy makers are acting to give banks the ability to refinance and boost their capital after September's collapse of Lehman Brothers Holdings Inc. prompted lenders to hoard cash. That sent the cost of credit surging, hurting the economy by choking off money to consumers and companies.

ECB council member George Provopoulos said the central bank ``remains vigilant and will do what is needed'' to both reduce inflation and ensure stability in markets, according to an interview with To Vima newspaper published yesterday. Colleague Ewald Nowotny told Austrian state broadcaster ORF-TV that, while the crisis should be ``under control'' by the middle of next year, the economy will suffer for longer.

Trichet criticized investors for creating the crisis by behaving with too much ``short-termism,'' which he blamed for amplifying the rise and the decline of markets. He said that having mis-priced risk, financial markets should now be subjected to greater transparency and regulation to curb their volatility.

Review Financial System

``We said there was an underestimation of the risks and of the price to be paid for these risks,'' he said. The crisis ``must force us to review the entire international financial system.''

ECB council member Erkki Liikanen told Finnish state broadcaster YLE TV1 yesterday that regulation will be strengthened across borders. ``All national regulators of banks operating across borders must join forces,'' he said. ``It will be a part of EU legislation and I'm sure it will even be agreed on a multinational level beyond that.''

While the ECB this month cut its benchmark rate by a half- point to 3.75 percent, with inflation still almost double its 2 percent limit, Trichet said its focus is ``entirely oriented to ensure price stability.''

``We will always, at any moment, do what is necessary so that I can continue to say to our citizens `you can have confidence, you will have medium-term price stability','' Trichet said. Such a goal should lend confidence to financial markets as ``there's now more than in the past the recognition of the fact that price stability'' helps expansion and hiring, he said.

`Important Slowdown'

The ECB president described his 15-nation euro-area economy as being in a ``very, very important growth slowdown,'' driven by tighter credit and also by this year's record fuel and food costs. Nowotny predicted the growth rate next year ``will be significantly below what we have in 2008.''

Such an outlook explains why investors expect the ECB to cut its benchmark rate to 3.25 percent by the end of the year, Eonia forward contracts show.

The ECB, which next releases economic forecasts in December, in September predicted growth of 1.4 percent this year and 1.2 percent in 2009. With the crisis worsening, the International Monetary Fund this month said it expects the euro-area to grow 0.2 percent next year, the weakest since the single currency began trading in 1999, after 1.3 percent in 2008.

Trichet acknowledged his own central bank had taken on risk by boosting liquidity and accepting lower-rated securities for loans.

``We're taking risks and we've made decisions that increased our risks, because we were facing a systemic liquidity crisis of first importance,'' he said. The ECB is an ``inspirer of confidence,'' Trichet said.

To contact the reporters on this story: Anne-Sylvaine Chassany in Paris achassany@bloomberg.net; Simon Kennedy in Paris at Skennedy4@bloomberg.net