Jean-Claude Trichet warned that Europe’s financial crisis had reached “a systemic dimension” as he unveiled steps by European supervisors to tackle dollar funding problems at large banks and clamp down on lending to householders in foreign currencies.
The most important task was to restore the credibility of sovereign debt, Mr Trichet told European parliamentarians. “It is absolutely fundamental. If we don’t have the credibility of the sovereigns, we don’t have a backstop if we have new possible crises – new dramas of the kind that we experienced in 2008. It is something that we are observing in real time, under our eyes.” Although he did not mention Greece, Mr Trichet’s warning hinted at the ECB’s alarm over attempts by Germany to push for a bigger burden being borne by private Greek government bondholders.
Escalating financial market nervousness has seen banks parking ever-greater sums at the ECB, rather than lending it to others. On Monday night, the amount left in its overnight deposit facility hit €269 billion – the highest since June last year. In another sign of tension, use of the ECB’s emergency lending facility, which incurs a penal interest rate, has been running at about €3 billion a day for the past week, suggesting acute problems somewhere in the banking system.
Mr Trichet was appearing before the parliament as chairman of the European Systemic Risk Board, the newly-created body set up to monitor risks to the continent’s financial system. He announced recommendations on bank lending in foreign currencies to households – a practice which has become widespread in countries such as Poland and Hungary – which he described as “a phenomenon that entails significant risks for the financial sector”.
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