April 15, 2016 / 1:45 PM / 2 years ago

ECB to phase out 500 euro note slowly after German backlash - sources

* Main scenario is to stop printing note in 2018

* Bill could be exchanged indefinitely

* Decision expected as early as May

By Frank Siebelt, Balazs Koranyi and Francesco Canepa

FRANKFURT, April 15 (Reuters) - The European Central Bank looks set to stop printing the 500 euro note, arguing it is used to finance crime, although the purple bill will only be phased out gradually due to resistance from Germany, several sources familiar with the matter told Reuters.

ECB President Mario Draghi said in February the bank wanted to “make changes” to the 500 euro note due to fears it may be used by terrorists and criminals, leading to speculation the banknote may be scrapped.

This prospect triggered a backlash in Germany, where the use of large bills as a means of payment and saving is deeply rooted, leading the ECB to choose a gradual process of withdrawal.

Euro zone central banking sources told Reuters the ECB’s banknote committee has tabled several options and the most likely scenario is that the purple banknote will instead simply stop being printed and distributed at cash points and bank branches in 2018.

“The most likely outcome is a very gradual phasing out,” an ECB insider said.

People would likely be allowed to exchange their banknotes indefinitely, mirroring the policy adopted by Germany’s own central bank when the euro replaced the Deutsche Mark in 2002.

A decision is expected at an upcoming non-policy meeting of the ECB’s Governing Council and probably as early as May.

The ECB declined to comment.

Even this compromise solution was unlikely to be backed by Germany’s central bank, which still fears that any restriction encroaches on citizens’ right to cash, one of the sources said.

One Bundesbank director, in fact, disputed that scrapping the note would help tackle terrorism and warned that this could instead see a little bit of “freedom” die.

Germany was one of the early champions of the 500 euro note to match the value of its old 1,000 mark note and cater to Germans’ traditional preference for cash over electronic money.

THE ‘BIN LADEN’

The 500 euro note is worth more than five times the value of the largest U.S. denomination -- the $100 bill -- and has been dubbed the ‘Bin Laden’ for its alleged links to terrorism and the difficulty of finding it.

Nearly a third of the 1 trillion euros circulating last year was stored in 500 euro notes, ECB data showed.

Yet 56 percent of European Union citizens have never seen one, according to a 2011 ECB survey, because the note is mainly used for hoarding cash, rather than paying.

There is no official data about the use of 500 euro notes by criminals.

But studies by the European Union police agency Europol, former banking executive Peter Sands and the United Nations Office on Drugs and Crime link it to crime, mostly citing anecdotal evidence.

In a 2015 report, Europol went as far as saying authorities should consider stopping issuing the banknote unless they found evidence it was used legitimately.

“As long as there is a credible allegation that the 500 note is used for illicit activity, the ECB has a moral obligation to act,” one of the sources said.

But critics argue the 500 euro note serves a legitimate purpose as a store of value, particularly at a time when bank deposits are not remunerated, several lenders are in distress and financial markets are turbulent.

By making it more cumbersome to store money in cash, the ECB decision would indirectly force savers to park some of their cash at banks, and therefore in the financial system, critics say.

They also stigmatise the loss of privacy stemming from switching to electronic payments, which are recorded on banks’ databases.

“It’s a slippery slope,” another source said. “If people got the idea that cash was going to disappear, that would be very dangerous.”

The ECB has been trying to encourage euro zone households and companies to put some of their cash to work by adopting an ultra-loose monetary policy in recent years but, so far, its success has been limited. (Additional reporting by John O‘Donnell; Editing by Toby Chopra)

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