Recent times have seen almost unprecedented turmoil in financial markets. The collapse of Lehman Brothers, the takeover of Merril Lynch and the salvation of insurance giant AIG were chief among the turbulent events. But were they inevitable given the fallout from the sub-prime crisis a year ago. Jean Claude Trichet, President of the European Central Bank dealt with this and other issues in an interview with euronews.
euronews: “Central bankers are supposed to have that 6th or 7th sense, when did you first realise that something really big was going on here?”
JCT: “Our judgement was, since last year, the ninth of August last year… we saw events in our own market that were totally unprecedented, and that were signalling that something big was coming, and that was the reason why we acted immediately. We surprised the observers when we decided within a very short span of time, I’m speaking of hours, of 1 hour and a half, and the executive board of the ECB decided to supply liquidity to be sure that our money market would continue to function in line with our policy rate. And that is also something that I would like to underline. We have a monetary policy stance which is always designed to deliver price stability in the medium term.”
euronews: “Who is to blame for the global credit crunch? Is it the greedy bankers, the wiley real estate agents, the Federal Reserve central bank or all of them? Who is to blame?
JCT: “Trying to scapegoat anybody is useless. It is the full body of the system which has to be reviewed, and we have to take care. And in my opinion things have to be changed in absolutely all parts of this global financial system, without, again, giving any privilege to anybody, any institution or any instrument. That being said we have a number of lessons that have already been drawn at the level of the FSF, the Financial Stability Form, which is the agreed methodology to draw the lessons. And if I have to sum that up, I would say we have to improve greatly transparency; transparency of institutions, transparency of instruments and financial instruments, particularly those obscure financial instruments that were toxic, and transparency of markets. Transparency is of the essence, not only because it permits decisions to be optimised. And decisions, I would say, by all decision makers. But also because it is the best recipe we have against contagion. behaviour.”
euronews: “Much of the current crisis is about confidence – or the lack of it – and if you look around, people fear they might be affected, many savers and depositors fear for their money. They are worried that banks exposed to too many defaulting mortgages might collapse, how safe are these banks?”
JCT: “I would say that the authorities, and I’m speaking of all authorities, have demonstrated that they were very alert; very keen on, as far as central banks are concerned, preserving liquidity and the appropriate functioning of the money market and the financial market; and we have, I would say, ‘spoken in acting’, particularly in acting in a coordinated fashion, as I said, to provide dollar liquidity at a global level in a close cooperation with the Federal Reserve, and you could see yourself what has been until now the action of the executive branches and the authorities of the executive branches. So, I would say that this is telling of the alertness of all authorities. And I would say myself that it is essential for confidence, and confidence building, that we continue to be alert as we are, as we are.”
euronews: “If the banks are safe, are people’s savings safe?”
JCT: “Again, the authorities are there to help when they can, and they proved they could. It’s very visible and very obvious, I would say, everywhere. That being said, of course, it is also the task of the private sector to behave as properly as possible, to improve. But these are the improvements that have to pave the way to the future. We must improve global finance in a very, very determined fashion.”
euronews: “There is also fear that mortgages might become more expensive, especially property owners who have a variable rate mortgage are very pessimistic about the future, what do you tell these people?”
JCT: “I would say of course that they can count on the central banks to deliver price stability on the medium run. And that is, of course, very important. To preserve confidence, and to improve confidence. in the situation where we are with many challenges, it is very important that the central be anchoring solidly expectations. And I would say to all consumers, to all households and particularly to the 320 million fellow citizens that we have in Europe: ‘you can count on us, we will deliver price stability over the medium term’. This of course will be expected by the markets and then it permits to have a financial environment which is as favourable as possible for sustainable growth and sustainable job creation.”
euronews: “It seems that commercial banks are increasingly reluctant to grant loans. Will this financial crisis make the economy worse, will people’s jobs be more precarious than before?”
JCT: “We see on this side of the Atlantic, in the euro area, that the loans to firms, to enterprises, to corporate businesses, remain dynamic. So I think that we have to observe that, and take that into account when we make a judgement. We clearly have dynamism in this part of our finance, in the euro area finance. Only to give you one figure, the outstanding loans to non-financial corporate businesses are, according to our last figures, ‘augmenting’ at a pace of a little bit more than 13% a year.”
euronews: “In order to avoid total disaster, and to save the sputtering markets, the US government last week announced an unprecedented rescue plan, with a tremendous price tag on it. Before that the Federal Reserve took over AIG and Fannie Mae and Freddie Mac, could you conceive of any circumstance, any situation, in which the ECB would act as the lender of last resort on such a massive scale for European institutions?
JCT: “The ECB and the euro system, mainly all the European central banks are members of the system, have responsibility as regards the providing of liquidity. It is what we have been doing since the August 9 of last year. It is what we have decided last week, in providing liquidity in euro flow, and providing liquidity in the dollar, in close cooperation with the US Federal Reserve. We have a responsibility as regards liquidity providing, we have no responsibility as regards the solvency issue that might emerge here and there. So, this is clear: we have to face up to all our responsibilities and, like other central banks all over the world, the liquidity responsibility is ours. The solvency responsibility is the responsibility of the executive branches.”
euronews: “Let’s take a look into the future, if we can ever go back to normal, what would that normal look like?”
JCT: “The judgement of the ECB since the very beginning was that we were entering a market correction of great magnitude with episodes of high level volatility, episodes of turbulence in a large range of markets, and from time to time hectic behaviour of market participants, and we added that it was an ongoing phenomenon. I would say the same at the moment, it is an ongoing phenomenon which calls for all authorities, and certainly central banks, being permanently alert.”