ECB considers scrapping 500 euro note

FRANKFURT (Reuters) - The European Central Bank is examining ditching the 500-euro note, its president said on Monday, describing the note used by savers to hoard tens of billions of euros as an instrument also used by criminals.

A bank employee holds a pile of 500 euro notes at a bank branch in Madrid January 13, 2011. REUTERS/Andrea Comas

Mario Draghi said savers would not be penalized and could use the 200 euro note instead to hold their cash.

“People will continue saving the 200 euro notes,” Mario Draghi told lawmakers in the European Parliament, saying that governors were considering action.

“The 500 euro note is being viewed increasingly as an instrument for illegal activities,” he said. “It has nothing to do with reducing cash.”

The amount of cash in the euro zone rose to more than 1 trillion euros ($1.1 trillion) last year, with almost 30 percent of it hoarded in 500 euro notes, reflecting fears about banks as well as exasperation with low returns on savings.

European finance ministers called on the ECB on Friday to look at ways to tighten access to the notes as part of a move to cut funding of militant activity.

It is more than five times the value of the largest U.S. note - the $100 bill.

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.

Cash hoarding has become more prominent throughout the years of crisis. Capital controls prohibit large withdrawals in Greece, where savers have hoarded tens of billions, after big depositors lost money in the country’s financial bailout.

($1 = 0.8983 euros)

Reporting by Balazs Koranyi and John O’Donnell; Editing by Hugh Lawson and Alison Williams