FRANKFURT -(Dow Jones)- The time for a tightening of monetary conditions in the euro zone is approaching, European Central Bank executive board member Juergen Stark said Tuesday.
"After extended discussions, we are moving closer to phasing out our liquidity measures, as not all of them will be needed to the same extent as in the past," Stark told a banking conference.
He noted that the revival of world trade, the rebuilding of inventories and the huge influence of fiscal and monetary policy stimulus measures had helped bring the global recession to an end, adding that "recent economic and financial information is encouraging."
Stark said that the most pressing need of the day is to remove moral hazard from financial markets, while ensuring that there is enough liquidity for "markets and solvent institutions" and that proper procedures are in place for resolving the insolvencies of systemically important financial institutions.
"The first line of defense is that market participants must be liable for their actions," Stark said, adding a heavy hint that this appeared not to be the case at present. "As yet, I have...not seen any significant change in the behavior of market participants," Stark said. He stressed that the record amount of liquidity created by central banks across the world in the wake of the 2008 financial crisis "mustn't sow the seeds of new imbalances."
Some analysts have expressed concern that the sharp rebound in equity and, especially, debt markets this year may be more due to excess liquidity, rather than any improvement in the fundamental value of those assets.
Stark also rejected the creation of an 'emergency fund' financed or co-financed by taxpayers to insure the financial system. At a recent meeting of the G-20 group of countries, U.K. Prime Minister Gordon Brown had suggested levying a tax on financial transactions to seed such a fund, but the proposal was resisted by the U.S. and others.
Stark also repeated his opinion that the ECB has no great need to change its approach to monetary policy, saying that its emphasis on monetary analysis had proved its worth. He also argued that the ECB doesn't need any new policy tools to maintain price stability in the future.
Web site: www.ecb.int
-By Geoffrey T. Smith, Dow Jones Newswires (+49 160) 743 40 90; geoffrey.smith@dowjones.com
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(END) Dow Jones Newswires
November 17, 2009 11:39 ET (16:39 GMT)
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