Trichet Says ECB May Be Unorthodox on Bank Financing, WSJ Says

By Simon Kennedy

March 23 (Bloomberg) -- European Central Bank President Jean-Claude Trichet said it is “pretty possible” that policy makers will keep taking unorthodox steps to spur bank lending, the Wall Street Journal reported, citing an interview.

“It’s pretty possible that we would continue to be non- conventional through the channel of bank financing,” Trichet told the newspaper, according to a transcript on its Web site. “This channel remains for us essential.”

With the 16-nation euro-area now in its worst recession since World War II, the ECB has sought to revive bank lending by offering financial companies unlimited amounts of cash for refinancing and widening the scope of debt it accepts as collateral.

“We will certainly continue to do whatever we think optimizes our situation,” he said. He repeated that the bank could cut its benchmark interest rate below the current record low of 1.5 percent and defended European governments against U.S. criticism that they haven’t eased fiscal policy enough.

Trichet told the newspaper that the strategy of focusing on banks was based on the fact that 70 percent of the euro-region’s financing comes from commercial banks and 30 percent by selling securities other than stocks, the reverse of the situation in the U.S.

He urged banks “to pass on to the real economy” the effects of low interest rates and high liquidity. “If I am shipping this message, it’s because we trust that this is not yet entirely done,” Trichet told the newspaper. He denied there was a “generalized case” of European banks derailed by toxic assets.

Zero Rates

While the Federal Reserve and Bank of Japan have cut their key rates to close to zero and the Bank of England’s is at 0.5 percent, Trichet said such low rates have “drawbacks” and are not “appropriate” in Europe. What counts is borrowing costs in markets, which are lower in Europe than in the U.S., he said.

“At times I see some observers looking at central banks as if they were participating in a race,” he said, according to the Journal. “But it is not a race.”

The Fed, Bank of Japan and other central banks have also begun buying assets to help reduce long-term rates, yet the ECB has so far resisted doing so. Trichet said the ECB had been generous with what collateral it accepts when making loans and that the European corporate securities market had “behaved properly in terms of volume” since January. As for government securities, it is important to note that the “risks” of central banks and governments are “clearly separated” in Europe, he said.

Regarding “possible outright purchases of securities in general I said that we are not pre-committed for any new decisions,” he said.

‘Gradual recovery’

Trichet repeated that 2009 would be a “very, very difficult” year for the European economy. He said there was scope for a “progressive gradual recovery” in 2010 even though most economies are in a “situation where the trend is downward.” The ECB would be “alert” to the risk of deflation although no expert anticipates it and wage and money supply data suggest it is not a threat, he said.

“We remain permanently alert,” he told the Journal.

The ECB president said it wasn’t justified to criticize European governments for not doing enough to end the slump. Rather than increasing spending, plans already hatched in the U.S. and Europe should be introduced as “efficiently and rapidly as possible,” he said.

Europe spends more on public programs and has a bigger social safety net than the U.S., he said. He urged the U.S. to be “quick” in enacting its plans to ease fiscal policy and to stabilize its financial system.

“There is a mutual understanding that when you take all into account, you see that on both sides of the Atlantic, what has been done on the fiscal side corresponds to the gravity of the situation,” he said.

To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net or