Sir, Anatole Kaletsky has reviewed the funding operations of the European Central Bank and concluded that the glass is empty, or at best half-empty, when in fact it is half-full (Economic view, Business, June 29). As it happens the ECB’s response to the financial crisis has made the best use of the limited tools available to it outside pure interest-rate policy.

The ECB does not have the freedom of action that the US Federal Reserve has, given that it has to deal with the sensitivities of 15 sovereign authorities. This is why, unlike the Fed or the Bank of England, its quantitative easing programme utilised covered bonds and not government bonds. This avoided a sensitive political argument over which country’s government bonds to purchase, and was the best alternative approach.

This multi-country sensitivity becomes even more acute when it comes to the parlous state of many eurozone country finances. It is forbidden for member states to bail each other out of a payments crisis. However, a sovereign default would create structural and political probems that would make the Lehman’s collapse — recognised quite rightly by Mr Kaletsky as the biggest economic policy blunder of the Bush Administration — look like a tea party in comparison. If a side- effect of the ECB’s large liquidity operation is to assist certain eurozone countries to remain solvent, via sale of their government bonds to banks funded by the ECB, then actually this is something to praise, not criticise.

The Federal Reserve’s list of acceptable collateral may be more restricted than the ECB’s in terms of credit quality, but under the Troubled Asset Relief Program US banks can sell a wide range of assets to it, some of which are lower than AAA-rated. In practice the ECB’s balance sheet will not be of appreciably higher credit risk than the Federal Reserve’s.

The ECB has to conduct monetary policy within a framework that is complex both politically and economically, a tightrope that is not the easiest to walk in a severe recessionary environment.

Professor Moorad Choudhry

Head of Treasury

Europe Arab Bank

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