Pressure mounts on ECB for currency action

15/05/2009 | Sid Verma, Phil Thornton

CEE central banks demand currency swap lines

Officials from across central and eastern Europe yesterday called on the ECB to step up vital support – including the extension of currency swaps – to its eastern neighbours, amid widespread anger that the bank is failing the region.

As Emerging Markets revealed yesterday, the ECB this week rejected pleas by eastern European countries for it to accept local currency-denominated sovereign bonds as eligible securities in refinancing operations with parent banks operating in the region. But it emerged last night the ECB has said it will consider providing currency swaps to on a “case by case” basis.

Czech central bank governor Zdenek Tuma told Emerging Markets that the ECB is “ready to consider case-by-case [currency] swaps.” But he added: “They say they are not ready to extend its collateral and to accept government bonds in local currencies.”

The ECB has not publicly stated its position on the possibility of providing currency swaps to non-eurozone economies. But in letters sent on Thursday to the central banks of Poland, Hungary and the Czech Republic, ECB president Jean Claude Trichet said it would consider extending currency swaps only in “exceptional circumstances,” according to people familiar with the matter.

The three central European nations are urging the ECB to announce publicly the availability of swap lines to their economies to boost market confidence in domestic liquidity.

The arrangement would see the ECB providing temporary currency swaps with central banks of new EU member states – giving them euro liquidity against their own currencies.

This would reduce the cost of short-term euro-denominated credit in domestic banking systems, without regional central banks having to draw upon on their foreign exchange reserves.

“If Hungary, Czech Republic and Poland got [a swap line], this would be a positive development,” Piotr Wiesiolek, deputy president of the National Bank of Poland, told Emerging Markets. “It would signal confidence for the market rather than have a practical role in Poland’s case,” Wiesiolek said – citing the country’s plentiful foreign exchange reserves and relative strength of domestic liquidity. Tuma added: “It doesn’t mean we would use anything.”

The EBRD added to the calls for the ECB to help its eastern neighbours by providing currency swaps. “I think the ECB should move in that direction,” EBRD chief economist Erie Berglof, told Emerging Markets. But he added: “The ECB is doing a lot to support western European banks. And I mean a lot.”

The ECB has accepted high-quality mortgage loans as eligible collateral for repurchase transactions with banks. But the bank’s refusal to accept CEE government bonds met with anger from policy-makers across the region.

Hungary’s central bank governor Julia Kiraly said that “it was very disappointing when they [the ECB] accept everything” but then refuse to extend new liquidity arrangements to eastern Europe.

Bergloff said the ECB’s temporary swap line facility to Denmark in October 2008 established a precedent for helping non-eurozone economies. The US Federal Reserve last November provided currency swaps worth $120 billion for 14 systemically important economies.

But Wiesiolek was pessimistic of the chances of the ECB providing short-term currency facilities. “The ECB is responsible for running monetary policy in the eurozone doesn’t have the incentive to influence monetary policy in non-eurozone economies.”

Analysts say the ECB authorities are worried bout stoking liquidity demands from across the region. “The ECB is just trying to be tough and fear going down a route where they may eventually have to extend more support and eventually even relax criteria fro joining the euro-area,” William White, former chief economist at the Bank for International Settlements, told Emerging Markets. The ECB declined to comment.

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