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ECB's Stark on the financial crisis

European Central Bank executive board member Juergen Stark spoke at an event in Luxembourg.

“To be realistic, the year 2009 will be a very difficult year. 2009 will be the year of adjustments in the balance sheets of banks, firms and private households. These adjustments should lay the foundations for economic conditions to eventually stabilize and improve.”

“While it is expected that the world economy will recover in 2010, risks surrounding the outlook are on the downside as the depth and length of the global economic downturn will crucially depend on the evolution of the financial crisis.”

“Let me stress that we in the ECB Governing Council anticipated in our interest rate decisions that there will be bad news to come for the first quarter of 2009, as we take our decisions in a forward looking manner. Once these expectations of further weakness in growth are confirmed by official data, we will not to take it into account again - there is no double counting.”

“In our view the economic outlook remains surrounded by uncertainty. The risks to economic growth appear now to be more balanced.”

“There is a high likelihood that in this process of ongoing disinflation annual HICP inflation in the euro area will temporarily turn negative in the middle of 2009. It also cannot be excluded that we will see in some euro zone countries negative inflation rates for a more extended period of time.”

“However, this will mark most probably only a trough in inflation. The same factors pushing down inflation in the first half of 2009, namely base effects related to volatile oil and food prices, will subsequently unwind and actually put upward pressure on prices, contributing to rising inflation rates over the course of the second half of 2009.”

“Let me emphasize that sharp fluctuations in annual inflation rates or the temporary emergence of negative inflation rates is a normal concomitant of any disinflation process, which by its very nature is temporary and thus should not be confused with another “d”-word, namely deflation. From a conceptual point of view, deflation is a completely different state.”

“Short-term volatility in annual inflation rates, including negative inflation rates, is not relevant from the medium-term perspective of monetary policy.”

“We expect that price stability is maintained at the medium-term. Moreover, available information indicates that medium-term inflation expectations in the euro area are solidly anchored at levels consistent with the aim of the Governing Council of keeping inflation at rate of below, but close to, 2% over the medium term.”

“Of course ... there remains room for further maneuver on money policy. But this will not fundamentally solve the problems which have caused the financial crisis. The contrary could be the case ... too low rates might in fact aggravate them.”

“Central bank measures aimed at easing credit conditions have not been met with undivided enthusiasm.”

“Central banks can alleviate liquidity risks. But they cannot address the perceived problems that impair the financial system.”

“Resolute action is needed to restructure, consolidate and recapitalize the banking system.”

“The commitments (by governments) to provide support are already substantial. But it will take time for the measures to be completely implemented and to show their full effects. In case these measures prove to be insufficient, they need to be complemented by further actions to address problems on the asset side of banks' balance sheets.”

“Ultimately, we alone as central bankers cannot resolve the current financial crisis. The onus is now on governments, supervisory and regulatory authorities, and the financial industry itself, to cooperate to act resolutely to restructure, recapitalize and consolidate the banking system.” (Reuters)