ECB looks for ways to lend against commercial paper

By Gregory Viscusi and Gabi Thesing
Bloomberg News
Monday, October 13, 2008

http://www.bloomberg.com/apps/news?pid=20601087&sid=aMrlyjJ9abEQ&refer=home

PARIS -- European Central Bank President Jean-Claude Trichet said the ECB will examine ways to widen its lending rules after governments asked it to set up a facility to buy commercial paper.

"We need new steps if we can't face the situation with the instruments we have," Trichet told reporters in Paris yesterday after a summit with European leaders to discuss a rescue package for banks. He said the ECB didn't have the legal powers to immediately follow the Federal Reserve and buy commercial paper.

Trichet last week ramped up the ECB's fight to combat the worst financial crisis since the 1930s. In addition to joining its counterparts around the world in cutting interest rates, the central bank also agreed to offer financial institutions unlimited cash at its main rate of 3.75 percent at its one week auctions.

The ECB has drawn plaudits from banks over the past year for allowing a wider range of collateral than its counterparts in money-market operations.

Trichet, flanked by French President Nicolas Sarkozy, said the ECB is nevertheless looking at the "entire system of guarantees, and we can imagine new measures to enlarge access to our system of guarantees." He added that "we imagine being even more open in the question of what's legitimate."

Trichet was speaking after Sarkozy and other leaders agreed to guarantee bank borrowing and use government money to prevent big lenders from going under. They are trying to stem a market rout after the Dow Jones Industrial Average notched its worst week since 1914. The MSCI World Index of stocks in 23 developed countries slid 20 percent, the most since records began in 1970.

... Draft

An earlier draft of yesterday's statement said governments "look forward to the ECB creating a commercial paper facility and similar instruments so as to provide liquidity to financial and non-financial companies." That was later watered down amid concerns about the legality of such a move. The final draft said governments "welcome" the ECB's intention to consider new rules "with regard to the eligibility of commercial paper."

"On the basis of a juridical analysis we decided that our mandate didn't allow us to do what was envisaged," Trichet said. Still, he said he can "imagine being even more open in the question of what's legitimate."

"Commercial paper was seen by some countries as important, but there are other things we can look at immediately," he said. Trichet didn't say if the ECB would shelve plans, announced in September, to tighten rules to stop some banks taking advantage of them.

... Fed Plan

The Fed on Oct. 7 said it will create a special fund to buy U.S. commercial paper, financing tools used by many companies to fund their business. It followed a slide in the market to a three-year low of $1.6 trillion as investors fled even companies with few links to the subprime mortgage crisis.

"The fact that the ECB can't buy commercial paper is not a huge impediment," said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt. "Banks are aware of their responsibility to the real economy. While lending to companies will tighten, as it always does in a recessionary environment, we won't see a fully-fledged credit crunch."

Trichet traveled to Paris after he and his ECB colleagues met their global counterparts at the Group of Seven meeting in Washington last week.

Policy makers including Trichet, Lorenzo Bini Smaghi, France's Christian Noyer, and Finland's Erkki Liikanen signaled they were not rushing into another rate cut, saying it will take time for the liquidity measures to take hold.

... Time

"We have taken a lot of actions in the past days and weeks," Trichet said at a press conference in Washington. "My experience of markets is that it always takes a little time to capture the elements" of the decisions taken. "It is normal that there is a maturing process."

Bini Smaghi said "markets need time" to process some of the changes introduced by the ECB and Christian Noyer said market participants should refrain from demanding new central bank action if there is no immediate reaction.

"If we continue like this it will never stop," he said.

The bank last week lowered its key lending rate by half a percentage point along with other central banks, which failed to halt a rout in credit and stock markets. The Standard & Poor's 500 Index dropped 18 percent last week, its worst performance in 75 years. Further turmoil may force the ECB into another cut on Nov. 6.

"If we get another week like last week, then they'll have to pull the trigger again," said James Nixon, an economist at Societe Generale. "We are facing a severe recession and rates need to come down fast," he said.

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