Future ECB leader hints at better lending terms for country's banks
The future head of the European Central Bank has said he would like to offer Ireland more generous lending terms, but fears the wider implications of such a move.
The ECB's refusal to offer medium-term loans to Irish banks has been one of the biggest disappointments for the new government.
Reports say a minority of ECB governors blocked a switch from the present very short-term 14-day debt, while ECB sources claimed the issue had become too politicised.
Yesterday Italian central bank governor Mario Draghi, who is to succeed sitting ECB president Jean-Claude Trichet in October, agreed that issuing longer-term loans to Irish banks would make a "big improvement" to restoring confidence in the banking sector but said the ECB had to "weigh different trade-offs".
Mr Draghi gave a hearing in the European Parliament the most detailed explanation yet for the ECB's reluctance to give longer term support.
He said that a special facility for Ireland would be "selective" and could hamper the ECB's objective of inflation control.
"If we have a medium-term facility that means basically that we are issuing liquidity on a permanent basis, no matter what price inflation or inflation expectations could be," he said.
"If we do it for one country, then why not do it for other countries? And if we do it for all countries, then we don't run a monetary policy any longer. All our liquidity would be stuck on a medium-term basis."
The ECB is currently pumping €130bn into the six main Irish lenders and has also bought up billions in Irish government bonds.
Fine Gael MEP Gay Mitchell, interpreted the remarks as "the most positive signal yet" that the ECB was amenable to extending the loans.