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ECB's Nowotny - ESM banking licence could be advantageous
July 25, 2012 / 7:30 AM / 5 years ago

ECB's Nowotny - ESM banking licence could be advantageous

FRANKFURT (Reuters) - There are arguments for giving Europe’s permanent rescue fund a banking licence to increase its capacity, European Central Bank Governing Council member Ewald Nowotny said, breaking ranks with ECB colleagues who have vehemently opposed the idea.

A banking licence would allow the European Stability Mechanism (ESM) to participate in the ECB’s liquidity operations, where it could exchange the bonds it has bought to support highly indebted countries for fresh cash and thus increase its firepower without additional government funds.

Asked about giving the ESM a banking licence, Nowotny told Bloomberg in an interview released on Wednesday: “I think there are pro arguments for this.”

His comments pushed the euro higher and European shares turned positive on the idea that the euro zone bailout fund’s firepower to tackle the region’s deepening debt crisis could be boosted.

Nowotny, however, said that the issue was far from settled and that it was not being actively discussed right now - an indication that, if were to be considered, it would take time to agree on the measure.

“There are also other arguments, but I would see this as an ongoing discussion,” he said, adding that he was “not aware of specific discussions within the ECB at this point.”

France has been behind a push to give Europe’s ESM bailout fund a banking licence so it can tap cheap ECB funding and increase its firepower.

The ECB has repeatedly rejected the idea, arguing it would be thinly disguised monetary financing of governments.

Monetary finance has been a taboo for the ECB, though when asked in a weekend newspaper interview about doing more to support the economy, ECB President Mario Draghi said: “We are very open. We do not have any taboos.”

At a news conference on July 5, Draghi was asked about the ECB’s view on granting the ESM rights to participate in ECB liquidity operations, and said that it would have grave consequences.

“I don’t think there is anything to gain in destroying the credibility of an institution, asking it to behave outside the limits of its mandates,” Draghi said.

In the Bloomberg interview, Nowotny also said that while the inflation outlook had softened, the central bank saw no deflation, or persistently falling prices, in the euro zone.

Reporting By Sakari Suoninen and Eva Kuehnen; Editing by Susan Fenton

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