Signaling that the policymakers across the Atlantic stand ready to tackle the lingering financial crisis more aggressively, European Central Bank Vice President Lucas Papademos said Thursday that the ECB may extend of the maturity of liquidity provided to banks and purchase private debt securities in the secondary market.
Noting that the sharp drop in the value of toxic assets has weakened many banks' balance sheets, Papademos also suggested that weakening economic activity has been impairing the quality of bank loans, adversely affecting their capital positions and their willingness to extend credit to the private sector.
The ECB's key lending rate currently stands at 1.5 percent for up to six months. With the Federal Reserve and central banks in Japan and the UK lowering their benchmark rates near zero, the ECB has been accused of being behind the curve in dealing with the economic crisis.
Emphasizing the importance of financial system reform and sound fiscal policy as essential conditions for sustainable growth, Papademos said that next week's summit meeting of the Group of 20 in London can mark a further important step in the effective pursuit of this reform agenda globally.
The prompt implementation of the proposed financial reforms will not only foster sustainable growth and financial stability in the long run, but it should also contribute to boosting confidence in the financial system in the short run, thus promoting economic recovery, said Papademos.
Addressing fiscal policy, Papademos conceded that government deficits, discretionary measures to stimulate the economy, and the funding of the bank support schemes were partly inevitable - due to the downturn - and partly necessary.
But it is also imperative that fiscal policies are designed and implemented in a manner that strikes the right balance between the need to support the economy's recovery and the need to preserve the confidence in the soundness and sustainability of public finances which is key for the long-term performance of the economy, he warned.
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