Published: Mon, 09 Mar 2009 11:34:45 +0100

ECB's Stark Says Global Economy in Deepest Slump Since WWII (Update)

(CEP News) Frankfurt - European Central Bank member Jürgen Stark said the world economy is in its deepest slump since the Second World War and said that it is difficult to predict when it will end.

"The year 2009 will be a very difficult year," Stark said at the fifth German-Luxembourgish Economic Conference in Luxembourg on Monday. "Policy makers need to prevent a further deterioration in economic and financial conditions."

However, central banks alone cannot solve the crisis, Stark said, adding that measures to restructure and recapitalize the banking sector are also needed. "(This year) will be the year of adjustments in the balance sheets of banks, firms and private households," Stark said.

Stark also said that rate reductions alone would not bring an end to the crisis and that rates at too low a level could be counterproductive.

"(Low rates) have the potential to weaken the incentives for banks to clean up their balance sheet of troubled assets and monitor their credit risk carefully," Stark said, echoing comments made previously to a Luxembourg newspaper over the weekend.

He also said that while the ECB has room to cut its policy rate further, there is a limit to every policy and that the ECB's key policy rate at 1.50% is already "very low".

Stark added that current measures taken by the central bank, including the expansion of its balance sheet and accepting corporate loans as collateral, are already unconventional and that there are limits regarding these measures as well.

"One could conceive measures to ease credit conditions by taking over some of the credit risk on commercial paper that banks currently hold," Stark said. However, "buying corporate debt outright would circumvent the banking sector," he added. The need to keep the keep the Eurosystem financially sound "puts a break on how much further we can expand our balance sheet."

Stark also warned that outright purchases of corporate debt may circumvent the banking sector. Operating through the banking sector has benefits, he added.

Written by CEP News European Staff, eunews@economicnews.ca, edited by Stephen Huebl, shuebl@economicnews.ca