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Germany demands LTRO loan withdrawal plan

Published:Wednesday | March 14, 2012 | 12:00 AM

Germany's top central banker has urged the European Central Bank to come up with a plan to eventually withdraw its massive emergency loans to banks, warning that they carry significant risks and have only bought Europe a temporary respite from its debt crisis.

Bundesbank head Jens Weidmann said Tuesday that the ECB and national central banks had run up added risks from looser collateral requirements for the loans and from the sheer size of the credits.

Though the crisis measures need not be withdrawn now, Weidmann said it was crucial that the ECB remain aware of the pitfalls and start a discussion about an exit.

"We as central banks must develop an idea of how we will organise and execute an exit from the special measures, how we will limit the risks that we have taken during the crisis," Weidmann said at the Bundesbank's annual news conference.

Loosening requirements

By loosening collateral requirements, the ECB gave banks more than €1 trillion (US$1.31 trillion) in loans in two operations December 21 and February 29.

The actual amount of new cash in the system is around €500 billion because banks moved some of their loans from other ECB offerings to these new ones, called longer-term refinancing operations, or LTROs.

The ECB's offerings, which Weidmann voted for as a member of the bank's 23-member governing council, have helped to calm markets as they have diminished fears over the exposure of Europe's banking system to bad government debt.

Although he has only one vote, Weidmann's views carry particular weight because he comes from the eurozone's biggest economy. The Bundesbank also has a reputation for its anti-inflation stance and support for strict adherence to the EU treaty provisions barring the central bank from supporting the finances of governments.

However, Weidmann warned of the risk that the loans may prop up banks with unsustainable business models, and that governments will lose their appetite to clean up their finances and reform their economies.

"A sensible limitation of risks starts with the causes," Weidmann said. "With these measures we have only bought time."

He said a discussion of how to exit was needed but did not immediately offer a way to withdraw the credits, which expire in three years.

Strengthen potential growth

ECB head Mario Draghi also urged banks and governments to use that time wisely to strengthen themselves and help the wider economy to return to growth.

"Countries should use this phase of financial stabilisation to make further progress on their programmes of economic reform to strengthen their potential growth, to boost unemployment and to enhance competitiveness," he said in a speech to an economic conference in Paris. "Banks, too, should use this currently more benign environment to strengthen their resilience further."

He said that by reinvesting their profits, and not distributing them in bonuses and dividends, banks could make more loans to households and businesses.

Draghi's remarks underlined his message from his monthly news conference last week - that the ECB has done its part for now and that it's up to governments to take the next important steps.

With the emergency loans, the ECB took on additional risk by broadening the range of financial assets it accepted as collateral.

It says it is managing those risks by demanding in some cases far more collateral than the amount of the loans.

Some have also been concerned that the loans could eventually push up inflation, but Draghi stressed that price increases remain in check.

"We are continuously alert to the risk of inflation, but this risk is not materialising at the present time," Draghi said.

- AP