“We can do a lot with regard to liquidity and in future we may take additional measures,” Nowotny said during a speech in Vienna yesterday. He declined to expand on which measures the ECB may take in future, saying he is observing the central bank’s “purdah” period ahead of a Dec. 8 rate-setting meeting.

The U.S. Federal Reserve and five other central banks including the ECB last week cut the cost of emergency dollar funding as tensions resurfaced in European money markets. Earlier this year, the Frankfurt-based ECB reintroduced a one- year refinancing tender to aid banks struggling for longer term cash amid a worsening of the euro area’s sovereign debt crisis.

“The greatest challenge we face now is to prevent that this crisis of public finances doesn’t lead to another markets crisis, and we end up in a downward spiral,” Nowotny said.

Nowotny said the euro area economy would experience “de facto stagnation” in 2012.

‘Immediate Problems’

Commenting on moves announced yesterday by French President Nicolas Sarkozy and German Chancellor Angela Merkel to back automatic penalties for deficit violators and locking limits on debt into constitutions, Nowotny said it may not do enough to mitigate the euro area’s short-term issues.

“I believe it is an important and correct element, however I have to say quite openly I fear it won’t be sufficient to solve the immediate problems,” Nowotny said. “That all takes time, and in the meantime large countries like Italy have a massive refinancing need in the first quarter of next year.”

Nowotny added he sees it as important that Germany’s central bank, the Bundesbank, isn’t isolated on the ECB’s governing council. Germany has voted against moves this year including stepping up the ECB’s program of buying sovereign debt.

“I see a tendency that the biggest economy in Europe, Germany, may increasingly have problems trusting the ECB. It makes sense to make policy that doesn’t isolate the biggest economy,” he said.

To contact the reporters on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net; Zoe Schneeweiss in Vienna at zschneeweiss@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

http://www.bloomberg.com/news/2011-12-05/ecb-can-do-more-to-supply-banks-with-liquidity-nowotny-says.html

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