Trichet acts amid fears of double dip

Click to follow
The Independent Online

European banks will be offered more assistance in funding their operations by the European Central Bank (ECB).

The president of the ECB, Jean-Claude Trichet, said yesterday that it would maintain its programme of purchases of bonds from the banks, with a further three operations in three-month liquidity to September planned. The ECB kept rates at a record low of 1 per cent.

The ECB move comes as the World Bank warned that Europe's debt crisis could "derail" the global economic recovery and put some nations at risk of a double dip. Referring to Greece, Ireland, Italy, Portugal and Spain, the World Bank said: "A serious loss of confidence in the debt of five EU countries combining high fiscal deficits and high government debts that led to a freezing-up of credit in those countries could cause GDP growth to slow by as much as 2.4 per cent in 2011 – pushing high income countries into recession."

Andrew Burns, the World Bank's manager of global macroeconomics, warned: "We're expecting that growth in the second quarter is also likely to be disappointing, quite possibly seeing negative growth in several European countries and a double dip in some of these economies."

National default and a consequent financial crisis would trigger such a new recession, with contagion spreading via the banking system. Barring such a relapse, the organisation said global GDP is projected to increase by 3.3 per cent in 2010 and 2011, and by 3.5 per cent in 2012.

Mr Trichet stressed that the ECB's extraordinary measures were temporary and that the bond purchases do not represent a change to monetary policy and an "inflexible" attachment to targeting inflation at 2 per cent.

The ECB's decision is a partial reversal of the monetary tightening seen earlier this year. During the height of the credit crunch the ECB introduced six and 12-month liquidity operations to help the banks.