A leading British banker has warned that the huge sums of money being pumped into western economies to underpin banks and promote financial stability risk "laying the seeds for the next crisis".
As central bankers on both sides of the Atlantic played down expectations that they were poised to unleash a fresh round of money creation, Peter Sands, the chief executive of Standard Chartered bank, warned it was "going to take time for the rich West to sort itself out".
But Sands's main concern was that support operations by western central banks, which have seen trillions of dollars pumped into the financial system through so-called quantitative easing, could set the scene for more trouble in the years ahead.
Breaking ranks from his fellow bosses, Sands, whose bank is focused mainly in Asia, said: "Banks are still going to have to refinance their loans in three years time. It's not clear what the exit strategy is, nor is it possible to predict what the long-term consequences will be."
He added that the crisis and the west's policy response had accelerated the shift in "power and dynamism" from the developed world to emerging markets.
Some economists have argued pump-priming the economy kicks the problem further down the road, while others fear an inflation time bomb has been created.
Sands said: "The risks to financial stability from this kind of intervention [by central banks and government] is unknown. But intervention on this scale will have repercussions."
Sands's outspoken comments came as central bankers across the west were in the spotlight over policy decisions.
US Federal Reserve chairman Ben Bernanke, who has authorised $2.3 trillion worth of bond buying to prop up the system, speaking in Washington on Wednesday, played down hopes that he will support further QE after official figures showed the world's largest economy expanding faster than first thought at the end of 2011.
In its latest estimate of fourth quarter growth, the US Commerce Department said GDP expanded at an annual pace of 3% – up from its last estimate of 2.8%.
In one of his twice-yearly so-called Humphrey Hawkins testimonies to Congress, Bernanke made clear he and his fellow Fed governors were still weighing up the strength of the US economy.
"In light of somewhat different signals received recently from the labour market than from indicators of final demand and production ... it will be especially important evaluate incoming information to assess the underlying pace of the economic recovery," he said.
The price of safe haven assets such as gold and silver fell sharply as Bernanke spoke, with the gold price down by almost $70 an ounce at one point. The FTSE100 also fell in afternoon trading to finish down 56 points.
The Bank of England governor, Mervyn King, also poured cold water on suggestions that a further round of QE in Britain, where £325bn has been pumped into the system so far, was on the cards later this year. Taking questions from Commons cross-party Treasury Committee, King said: "By and large, I don't think there's any hard and fast expectation that we're inevitably going to do much more."
Their comments came after the European Central Bank in Frankfurt announced that it had handed out another €530bn of cheap loans to eurozone financial markets, helping to push stock prices up in morning trading.
The ECB's long-term refinancing operation (LTRO), which offers banks three-year loans at an interest rate of 1%, was the key crisis measure introduced by its governor Mario Draghi, last year to stave off the risk of a full-blown eurozone credit crunch.
The Frankfurt-based lender said on Wednesday, a day after banks were invited to bid for the loans, that 800 financial institutions had borrowed a total of €529.53bn, in line with market forecasts, taking the total borrowed under the LTRO to more than €1trn.
Michel Martinez, a eurozone economist at SocGen, described it as a "goldilocks allocation" – neither too large nor too small to alarm financial markets.
"The amount allocated at the ECB's second three-year LTRO seems to strike a good balance between a very large number that may have been seen as a sign of weakness of the banking sector and a small number that would have been seen as not making much difference to risk assets," he said.
Analysts also said the large number of borrowers suggested smaller banks had been able to tap the cheap loans, as well as the large institutions that were seen as the main beneficiaries of the previous round of funding.
But some banks, including Standard Chartered and ING, were keen to distance themselves from the operation, stressing that they had not taken any of the cash.
In the first LTRO, in December, the ECB lent just under €500bn. The measure was widely seen as critical to restoring calm to financial markets – and mending the finances of ailing European banks. Italian and Spanish lenders used the funds to buy their governments' bonds, helping bring yields down to more manageable levels.
However, some economists have echoed Sands's concerns by warning that the LTRO is storing up huge problems for the future if the eurozone banks have failed to recover strongly enough by the end of the three-year period to wean themselves off public support.
Investors had warned that a higher-than-expected take-up of the LTRO could signal distress among eurozone banks.
Christel Aranda-Hassel, economist at Credit Suisse, said the ECB was likely to hold fire for the time being from offering a fresh boost to the economy — by resuming interest rate cuts, for example. "We expect the ECB to take a back seat now and assess the effect of its liquidity injection."
The Guardian
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