FRANKFURT (MNI) – The European Central Bank’s long-term liquidity
injections appear to have a positive effect on financial markets and
bank lending but possible adverse effects call for a timely exit, the
European Commission said in its Spring Forecast report on Friday.
The EU Commission noted the salubrious effect of the ECB’s LTROs on
financial markets and concurred with the ECB’s oft-repeated contention
that the operations had helped avoid a credit crunch.
It is still too soon to gauge completely the impact of these
operations on financing of the real economy, it said, echoing monetary
authorities. It noted that “credit growth tends to respond to liquidity
injections with some lag, particularly in a still highly uncertain
environment.”
Nevertheless, the Commission warned that “there are concerns that
the ECB’s non-standard measures may contribute to reducing the incentive
for banks to strengthen their balance sheets, which might support credit
flows in the very short-term, but which is likely to imply constrained
lending further down the road.”
“The question of the ‘exit strategy’ from the substantial LTRO
funding at the three-year horizon and the return to market financing
(also with longer maturities) will need to be addressed,” the Commission
said.
The report cautioned that in addition, “the current low interest
rate environment, a weak business cycle, and depressed collateral values
may lead some banks to postpone loss recognition, thus constraining
lending potentially even further if interest rates rise or if
macroeconomic conditions continue to deteriorate.”
— Frankfurt bureau: +49 69 720 142; email: jtreeck@marketnews.com —
[TOPICS: M$G$$$,M$X$$$,MAGDS$,M$XDS$,MT$$$$,M$$EC$,MGX$$$,M$$CR$]