ECB :“Too low a rate level can even be counter-productive.”

March 7 (Bloomberg) -- European Central Bank Executive Board member Juergen Stark said cutting interest rates won’t remedy the financial crisis and pushing them too low may backfire.

“The financial crisis can’t be solved with rate cuts,” Stark said in an interview to be published in Luxembourg’s Tageblatt newspaper on March 9. “Too low a rate level can even be counter-productive.”

The Frankfurt-based ECB this week lowered its key rate by a half point to a record low of 1.5 percent and President Jean- Claude Trichet indicated it may act again to combat the worst recession since World War II. At the same time, some central bankers are signaling unease with the prospect of rates falling much further for fear they may provoke future inflation and won’t do much to reverse the current economic and financial turmoil.

“The lower rates are, the less incentive banks have to clean up their balance sheets and carefully monitor their credit risks,” Stark said. Erkki Liikanen, who heads the Bank of Finland, told broadcaster YLE today that while the ECB has room to cut rates more “the impact is weakened” the closer they drop toward zero.

Such comments echo those made yesterday by ECB colleague Lorenzo Bini Smaghi, who cautioned against monetary policy makers “overshooting and cutting interest rates to too-low levels.”

Stark said the financial turbulence will be solved by a restructuring and recapitalizing of the banking sector. While he said there are no signs that inflation will accelerate in the medium-term, he urged governments not to fan it by running excessively easy fiscal policies for too long.

Money Markets

Stark said there are signs of improvement in money markets, noting that banks are borrowing less money from the ECB in its refinancing operations and that fewer institutions are participating in them.

The economy of the 16 euro nations is shrinking faster than the ECB expected just three months ago as the global slowdown curbs export demand and companies lay off workers. The bank this week cut its economic growth and inflation forecasts for this year and next.

The economy will contract about 2.7 percent this year and stagnate in 2010, according to the new forecasts. Inflation will average about 0.4 percent in 2009 and 1 percent next year, the projections show.

In another speech today, Bini Smaghi said banks need to increase their capital ratios. “The crisis keeps weighing on the banking system, increasing their bad loans and diminishing the confidence in the system,” he said at a conference in Cortina D’Ampezzo, Italy. “Banks need to increase their capital ratios to restore confidence in the financial system.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=abyd1k3T2dyA&refer=home

So where are the Eastern European credit exposure fears everybody is crying about? It should have some immediate effect on money market rates, or you think Western European banks are trying to "sit it out" ? It´s easy to bang the drums in this "cataclismic" environment ! Where are tha facts ? Austria 245 bn exposure ? So, how much of this exposure has defaulted ? Moody´s expecting default rate of up to 25 %. Ha, ha, ha ! Moodys = owned by US investment banks. Obvious attempt to talk down USD / EUR and to draw off the attention from the US !