2010.11.1507:52:00UTC+00ECB's Constancio: High Forex Lending Endangering Low-Income EU Nations

Large sums of foreign currency loans in low income countries in central, eastern and south-eastern Europe has impaired the ability of the monetary policy to influence the economy, European Central Bank Vice President Vitor Constancio said Monday.

"The existence of a large stock of loans denominated in foreign currency has weakened the ability of monetary policy to influence the economy through the interest rate channel," Constancio said in a keynote lecture at Oesterreichische Nationalbank in Vienna.

In addition, central banks in this region seems to have become hesitant to alter their policy stances in the light of the possible adverse implications for financial stability stemming, for example, from a downward pressure on the exchange rate, the policy maker said.

The increasing share of foreign currency in total lending in these countries was accompanied by a strong expansion in overall credit amid strong inflows of foreign capital attracted by expectations of dynamic economic convergence, he said.

However, the major role played by foreign currency lending has posed some challenges for the conduct of monetary policy, Constancio said. He felt that the issue of foreign currency lending requires a "supranational approach," at least at the EU level. Briefing the press on the sidelines of the conference, the central banker reportedly said that if a formal appeal is made, ECB is ready to support Ireland's request for a financial aid to cope with its widening budget deficit.

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