The European Central Bank has rejected pleas from central
and eastern European states for it to use its firepower to
boost euro liquidity in the regions beleaguered banking
system, Emerging Markets can reveal.
Non-eurozone central banks in eastern Europe had
aggressively lobbied the ECB in recent months, to accept their
local currency-denominated sovereign bonds as eligible
securities in ECB refinancing operations with parent banks
operating in the region.
But central banks in Poland, Hungary and the Czech Republic
the most vocal of lobbyists on this issue
yesterday received letters from ECB president Jean-Claude
Trichet informing them he had rejected their calls, people
familiar with the matter said.
The move was met with outrage yesterday by policy-makers
across the region. I dont see the financial logic
in the ECBs decision, Mykolas Majauskas, adviser to
the Lithuanian prime minister, told Emerging
Majauskas said the ECB could mitigate exchange-rate risk
a key sticking point behind its decision by
applying an appropriate haircut to non-euro sovereign bonds to
cover the risks.
He argued that countries such as Lithuania, which maintain a
currency peg to the euro, have a stable exchange rate
And he added that proactive policy responses by the IMF and
European Commission to address balance of payment difficulties
in eastern European countries mitigated the risk of sovereign
default, another ECB concern.
Sources privy to the discussions said hawks inside the ECB
believe the central bank risked taking on currency risk with
this measure, which would detract from its mandate of
maintaining financial system stability.
Lars Christensen, senior analyst at Denmarks Danske
Bank said: the ECB took the view that if they did it for
Poland or Lithuania, they would have to do it for the whole
region, which would be very ambitious.
But Katarzyna Zajdel-Kurowska, Polands representative
to the IMF, said: Given the fact the ECB accepts mortgage
loans as collateral, I dont buy the argument that the
move would create significant credit risks.
She added: Western Europe has crowded out places like
Poland in the international capital markets through fiscal
Radovan Jelasic, governor of the Serbian central bank, told
Emerging Markets: Many non-eurozone members would really
love the ECB to accept their loans, but the ECB just really
doesnt want to.
Trichet had assured regional central banks in March that the
ECB would actively consider new monetary policy tools to boost
liquidity in non-eurozone economies after aggressive lobbying
from regional central banks, led by Hungary, said internal
Hopes were raised that the ECB would take aggressive
measures to boost euro liquidity in new member states, when the
bank announced last week it would buy covered bonds, in a move
widely viewed as quantitative easing. In August 2007 the ECB
accepted high quality mortgage loans as eligible collateral for
repurchase transactions with banks.
At a May 7 meeting between the ECB board members and
representatives of the non-eurozone central banks, governors of
the new member states were asked to leave while the board
discussed the liquidity measure, according to a source close to
The ECBs refusal to broaden its list of eligible
criteria to include non-eurozone sovereign bonds in its
repurchase transactions with banks has increased the cost of
Western banks operating in non-eurozone EU states have found
their funding costs on the inter-bank market soar since the
financial meltdown in mid-September. While the ECB has taken
unprecedented steps to provide liquidity to banks operating in
the eurozone, eastern Europes relative liquidity position
As a result, parent banks have become more reluctant to
commit their balance sheets to local subsidiaries, as financial
institutions move to shore up their positions.
The ECB declined to comment. There are no ECB board members
attending the EBRD annual meeting today.