Trichet: Transparency Best Defense Against Contagion

Bouts of economic and financial market turbulence over the past 25 years have shown policymakers that transparency is the best protection against contagion from such events, European Central Bank president Jean-Claude Trichet said on Saturday.

Speaking at a conference in Salzburg, Austria, Trichet said lucid analysis, speedy action, and consensus between experienced heads will also help minimize contagion.

He was not referring specifically to the current wave of credit and money market turbulence affecting broader markets and economies around the world.

But he said in times of crises, be they centered on sovereign risk or financial market stability, "herd" behavior often takes over.

"In hectic times, when fear dominates, the absence of transparency fosters herd behavior and amplifies considerably the initial shock that triggered the turbulences," Trichet told the Salzburg Seminar.

"Transparency vis-a-vis investors and savers, transparency vis-a-vis surveillance authorities, appears to be the best vaccine against contagion."

Trichet warned against rushing to hasty judgments but also said speedy action helps nip crises in the bud.

"It is always a recipe for additional difficulty to over-assess the gravity of a particular situation and therefore to over-react. But it is equally dangerous to misjudge a particular situation by underestimating its gravity and the risks that are at stake," Trichet said.

"Experience is of the essence ... (and) acting expeditiously is a must," he said.

One indication of how financial markets are currently reeling from the U.S. subprime mortgage market turmoil is the high level of euro money market lending rates.

London interbank offered rates for euro deposits were fixed on Friday at 4.78688%, the highest since May 2001 and a hefty premium over the ECB's 4% base rate.

Overnight rates were also fixed at a premium over the base rate, reflecting banks' need for short term cashflow and reluctance to lend out.

In the question and answer session that followed, Trichet said he had no comment to make on the current level of the dollar or exchange rates in general.

"I will stick to my policy, which is very well known," Trichet said, referring to the Group of Seven stance that excessive exchange rate moves cold hamper growth.

He said he had nothing to add to Washington's stance on the dollar, which is a strong dollar is in the interest of the United States.

The dollar fell on Friday to a record low against the euro and a post-Bretton Woods low against a basket of currencies.

Trichet also said the ECB was "decisively" in favour of the free flow of capital, but said there was a need for meditation when dealing with capital being invested for strategic reasons, instead of more conventional profit motives.