ECB says 'essential' to wind down non-standard measures

(FRANKFURT) - It is essential the European Central Bank wind down its fire-fighting role in the debt crisis as soon as it can so as not to create new risks for the financial system, an ECB official said on Monday.

"A timely exit from non-standard measures and a return to a less accommodative stance -- once the economic conditions are ripe -- are essential," ECB executive board member Benoit Coeure told a banking conference in Tokyo in a speech made available on the bank's website.

"Monetary policy accommodation for prolonged periods of time might fuel excessive risk-taking, leverage and asset price bubbles," Coeure argued.

And "it might discourage banks, companies and governments from strengthening their balance sheets and therefore create a dependence on low rates," he said.

Since the eruption of the current crisis, the ECB has been busy trying to put out the crisis fires on a number of fronts.

It embarked in 2010 on a controversial programme of buying up the bonds of debt-wracked countries.

It has brought its benchmark lending rate back to its previous historic low of 1.0 percent, effectively reversing last year's two earlier rate hikes.

It has eased the rules on bank collateral and cut banks' minimum reserve ratios, and after long resisting calls to take a haircut or writedown on its holdings of Greek bonds, it finally agreed to forego profits on them.

Most recently, it made more than 1.0 trillion euros ($1.3 trillion) available to eurozone banks at rock-bottom interest rates in order to prevent a dangerous credit crunch.

Critics suggest the provision of such vast amounts of liquidity could fuel inflation in the long run and that some of the measures have overstepped the ECB's overriding mandate to safeguard price stability in the single currency area.

Nevertheless, the ECB's current president Mario Draghi and his predecessor Jean-Claude Trichet have repeatedly said the measures are only temporary and it is ultimately up to governments to get to the root of the crisis and put their finances on a solid footing.

"It is not the role of the ECB to cure the root cause of the malaise," Coeure said in Tokyo on Monday.

"Monetary policy is not and cannot be a substitute for sustainable fiscal policies, structural reforms and adequate governance. These policies are indeed in the remit of governments," he said.

Ever since the ECB pumped one trillion euros into the financial system via new three-year long-term refinancing operations (LTROs), the central bank has scaled back its purchases of government bonds.

Data released on Monday showed that the bank bought no bonds of eurozone nations last week.

The purchases also previously dried up between January and August 2011, but the ECB resumed the programme in August when renewed strains pushed Italian and Spanish borrowing rates to unsustainable levels.

At one point, purchases reached as much as 22 billion euros in a single week.