ECB's Constancio says not actively preparing new long-term loans now
WASHINGTON Oct 9 (Reuters) - The European Central Bank is not actively preparing to make further long-term loans to euro zone banks but is having general discussions about the tools at its disposal, ECB Vice-President Vitor Constancio said on Wednesday.
With euro zone growth still fragile, the ECB is paying close attention to any moves in market interest rates which could threaten economic recovery or push inflation too low.
Although market rates have eased in recent weeks, the early repayment of two previous long-term loans to banks, or LTROs, extended by the ECB in late 2011 and early 2012 is sucking excess liquidity out of the system and risks putting upward pressure on rates.
Constancio told Reuters on the sidelines of International Monetary Fund meetings that a new LTRO was "not exactly" under active discussion, pointing to ECB President Mario Draghi's statement last week that the ECB was ready to use any instrument as needed to keep market rates at appropriate levels.
"It is an instrument which is in our toolbox and could be used," Constancio said.
"He (Draghi) said ... we have a lot of tools to use, including an LTRO, but it does not mean that we are actively preparing one. We have had general discussions, but no particular instruments have been selected."
A new LTRO could aim to raise excess liquidity, the amount of money beyond that needed for the banking system to function. This has fallen to 222 billion euros ($300 billion) from over 800 billion early last year, approaching a level expected to push market rates up and closer to the ECB's main interest rate, now 0.5 percent.
ECB experts are analysing the option of issuing LTROs and their work will be reviewed by the policymaking Governing Council before any decision is taken.
Constancio also said that he did not believe the partial shutdown in the United States government, now in its second week, would have an impact on the global economy, but a debt default would be much more severe.
Investors are nervous that Congress may fail to raise the U.S. borrowing limit, leaving the United States at risk of defaulting on debt that comes due or has coupon payments in late October and early November.
"It's certainly a reasonable risk. But I don't believe that there will be a default, it would be very significant and negative for the world economy," Constancio said. ($1 = 0.7398 euros) (Reporting by Krista Hughes; Editing by Chizu Nomiyama)
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