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Tuesday, May 26, 2009

"Call on governments to make clear their exit strategies from fiscal stimulus." - NOT!

Paramo Says ECB to Buy Bonds in June, Seek Quick Exit (Update1)

By Emma Rossthomas

May 25 (Bloomberg) -- European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo said the bank is likely to start buying covered bonds in June and will seek a quick exit from its non-standard policy measures.

Purchases of covered bonds will start “as soon as it’s technically possible” which “could be weeks,” Gonzalez-Paramo told reporters in Madrid today. Still, “what we want is to return as soon as it’s possible to a normal framework, to leave non-conventionality,” he added.

The ECB has cut its key interest rate to a record low of 1 percent to counter the worst recession since World War II. The Frankfurt-based bank this month stepped up its fight against the crisis by pledging to buy 60 billion euros ($84 billion) of covered bonds, low-risk securities backed by mortgages and public-sector loans. It also said it will lengthen the maximum term of its loans to banks to 12 months to help free up credit.

The measures still lag the U.S. Federal Reserve and Bank of England, which have reduced their main lending rates to close to zero and started buying government and corporate debt to pump money into their economies.

Gonzalez-Paramo said the ECB is still focused on keeping inflation below 2 percent in the medium term.

Inflation Risks

“We don’t have much problem imagining how to withdraw an excess of liquidity at the moment when we think there are upside risks for price stability,” he said. “You know our previous framework and that remains for us the reference.”

Recent economic reports suggest the recession in the 16- nation euro area may be easing. Business confidence in Germany, the region’s largest economy, rose for a second month in May, the Munich-based Ifo institute said today.

“The latest data and survey results seem to show some signs of stabilization at very low levels,” Gonzalez-Paramo said. “However, the world economy including the euro zone continues to pass through a period of strong recession.”

The risk of deflation is “low,” though uncertainty remains high and policy makers are alert to risks, he said.

Gonzalez-Paramo called on governments to make clear their exit strategies from fiscal stimulus. “If not, we all know what the impact may be of large issuance of government debt maintained over long periods,” he said.

To contact the reporter on this story: Emma Rossthomas in Madrid aterossthomas@bloomberg.net

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