ECB's Trichet: banks must finance economy

European Central Bank President Jean-Claude Trichet lent his weight Wednesday to new British and French moves to support their economies by shoring up banks with new bailout programs in an attempt to get them lending to businesses and consumers again.

He said the euro-zone central bank had to make sure that banks return to financing the economy - in a year where governments will be the only driver of demand in Europe's recession-hit economies.

"We need to be as active as possible in financing the economy. What the ECB has done and what governments do is basically designed to ensure that the economy is financed by banks," he said.

Banks are still reluctant to lend to businesses and households despite receiving billions of euros (dollars) in capital injections and state guarantees since October. Tight credit could stall government efforts to stimulate growth with massive spending programs this year.

Britain announced a second rescue plan for the country's ailing banks on Monday, hoping to thaw frozen lending by offering to insure banks against large-scale losses on bad assets they already hold.

France said Tuesday it would inject euro10.5 billion ($13.58 billion) of state funds into its six major banks. And Belgium said Wednesday that it was also considering a new bailout program as banking shares plunge.

Trichet said he did not see any signs that a rapid plunge in euro-zone inflation from record highs would lead to deflation, a corrosive spiral of declining prices.

"There is presently no threat of deflation," he said. "What we are currently witnessing is a process of disinflation, driven in particular by a sharp decline in commodity prices."

Nor did he see any risk of countries that are piling up debt leaving the euro - such as Italy, Spain, Ireland and Greece. Such speculation was "unfounded," he said.

Trichet claimed that that there are "some signs of improvement in the money market" because the rate for three-month loans in euros - known as the European Interbank Offered Rate - was falling.

But there is still "hesitation between banks when engaging in transactions," he said, urging banks once again to return to lending more to each other and to customers.

EU finance ministers also called on banks Tuesday to give out more loans, warning them against using state bailout money to shore up their balance sheets.

Speaking to the European Parliament's economic and monetary committee in Brussels, Trichet said there was a high level of uncertainty about how the economy would far this year but "we see 2010 as the year of going back to positive figures," after this year's "great slowing-down."

The EU's executive said Monday that the 27-nation EU and the smaller group of 16 nations that share the euro currency would both contract this year, the EU by 1.8 percent and the euro area by 1.9 percent.

Trichet acknowledged that "all currencies are under pressure" but refused to comment on the dramatic fall of the British pound against the euro or volatile exchange rates with the U.S. dollar. Britain is one of the euro area's biggest trading partners.