Bundesbank warns ECB cash might create new bubbles | Business| Economy and finance news from a German perspective | DW | 19.03.2012
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Bundesbank warns ECB cash might create new bubbles

The German central bank fears that the multi-billion-euro cash injections into the European banking system are creating speculation bubbles. It urged the European Central Bank (ECB) to devise an exit strategy.

European financial institutions were close to "entering risks" which Germany's central bank "would not want to see again," Bundesbank board member Joachim Nagel told the online edition of the German news magazine "Spiegel" on Monday.

In December and January, the ECB provided European banks with a combined one trillion euros ($1.3 trillion) in cheap three-year loans. The move was intended to shore up the banking system, which was threatening to collapse in the face of the eurozone debt crisis.

Nagel said there was a danger arising from the fact that "most of the cash" was currently "parked" at the ECB at just 0.25 percent interest.

"Since they were given the money for one percent interest, it is a bad deal for the banks, increasing their willingness to go for higher risk," Nagel added.

The Bundesbank official called on the ECB to "closely watch" where the money "is going to be invested in," and said it was necessary for the central bank to start preparing Europe's financial institutions for a "gradual phaseout" of cheap ECB funding.

Exit strategy

The interview came after the ECB said last week that it was still "too early" to remove central bank support for the banking sector.

"Just now we have to see how the various measures affect the economy. In the meantime, I do not see any need for further action," ECB Governing Council member Ewald Nowotny told Reuters news agency at the time.

The ECB was already discussing how to "organize and exit," he added, stressing, however, that the move had to be done in a way that would not "disrupt" the economy.

The rift between Germany's Bundesbank and the ECB became apparent at the end of last year when German central bank chief Axel Weber as well as ECB former chief economist Jürgen Stark resigned.

The two Germans were said to be opposed to the European Central Bank's money market policy, notably to its controversial program of buying up bonds of struggling eurozone members.

uhe/ng (dpa, Reuters)