UPDATE 3-ECB's Nowotny: No need to bypass banks on credit
* Nowotny sees no need for ECB to bypass banking channel
* Contrasts recent comments from Bundesbank's Weber
* Too early to think about adding to covered bond plan
* ECB to publish covered bond purchase program details
* Mersch says deflation risk has decreased
* Mersch: too early to worry about high overnight deposits (Adds Mersch)
By Boris Groendahl and Michele Sinner
VIENNA/LUXEMBOURG, July 6 (Reuters) - European Central Bank policymaker Ewald Nowotny appeared at odds with his Bundesbank counterpart Axel Weber on Monday, insisting there was no need to bypass the banking channel to ensure credit reaches firms and consumers.
He also said it was too early to consider scaling up the ECB's 60 billion euro ($84 billion) program to buy mortgage- and public sector-backed debt. That program started on Monday and the first details on purchases are due on Tuesday.
Nowotny, who heads Austria's central bank and sits on the ECB's Governing Council, said he saw "no necessity" to bypass banks to kick start the flow of credit. "For banks, it is in their own interest to provide credit," he told a news conference.
Data continue to stoke concerns the finances of firms and consumers are being strangled as banks rein in lending. Banks hoarded a record amount of cash at the ECB, figures revealed on Monday and growth in lending has slowed to an all-time low. For more see [ID:nFAT004776] and [ID:nLU302287].
ECB President Jean-Claude Trichet again urged banks to lend over the weekend. [ID:nL5643198]
Nowotny's comments also put him at odds with authorities in Germany, where Finance Minister Peer Steinbrueck said over the weekend that the government would sit down with the Bundesbank and come up with a solution unless there was a turnaround from banks. [ID:nL5164229]
Bundesbank President Weber has raised the prospect the ECB could circumvent the banking sector altogether if lending doesn't free up.
Overnight deposits at the ECB spiked after the bank poured 442 billion euros into money markets on June 25. Nowotny shrugged off worries that banks may keep hoarding the funds, rather than lend them on.
"A strategy of taking money from the ECB and then putting it back into the deposit facility can only be short term," he said.
It is also too early to think about scaling up the ECB's 60 billion euro kitty to buy covered bonds, he said.
"I expect that it will increase credit ... We will look at the development over the summer and then have a review in the autumn. It's too early to speculate about further steps," Nowotny said.
Fellow Governing Council member Yves Mersch of Luxembourg shared Nowotny's sentiment about drawing conclusions soon.
When asked about whether he was worried about the record-high deposits, Mersch said it was too early for that and declare defeat with liquidity injections.
"It's absolutely premature to draw any conclusions on this," Mersch said. "I think banks do not overnight invent new projects." He also said the demand for loans had a lot to do with record-low credit growth in the euro zone.
But he bemoaned the fact banks have been more likely to curb lending than take advantage of recapitalisation offers.
The euro zone will return to economic growth by mid-2010 but growth rates would be rather subdued after that, Mersch added, and said the risk of persistently falling prices has decreased.
"I would not consider at this time that the risk to deflation would have increased, I would rather consider the contrary," Mersch said at a conference on the consequences of the financial crisis.
"During the year 2010 we will again be in strongly positive territory concerning price development," he said, and added the current negative inflation rates are just the flipside of the inflation spike last year.
The ECB kicked off the 60 billion euro buy on Monday but many of the details surrounding the plan remain a mystery.
The Austrian central bank backed recent comments from Italian monetary sources, that the 60 billion total would be split based on the amount of Eurosystem capital countries have.
"It is mostly divided according to the ECB's capital key, but not only according to it," a spokesman for the Austrian central bank said.
Nowotny said earlier the bank would "participate on a substantial scale," but declined to comment on how much it would spend.
The ECB said on its Reuters information pages ECB35 and ECB60 that it would publish the size of the covered bond purchase program as part of regular updates on liquidity supply, which normally come soon after 0700 GMT ECB59 on weekdays.
Nowotny, who took the top job at the Austrian central bank last year, also touched on worries about hard-hit central and eastern European economies.
"We see no substantial risks for (emerging European states) that are members of the European Union; for the others it needs to be viewed differently," he said.
"We assume that central and eastern European countries are of course impacted by the current economic downturn, but we also believe that there are signs of stabilisation in some areas."
Austria's banks remain highly exposed having lent there heavily during boom years earlier in the decade. Nowotny said Austrian banks' Tier 1 capital ratios risked dropping to just over 5 percent unless they raised cash. [ID:nL6147440] (Writing by Marc Jones and Sakari Suoninen; Editing by David Stamp, Ruth Pitchford and James Dalgleish)
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