ECB's Stark raps move to boost IMF drawing rights

European Central Bank Executive Board member Juergen Stark on Tuesday criticized the decision made at the G20 summit to boost the IMF's Special Drawing Rights (SDRs) as ill thought through and potentially inflationary.

Stark said the decision could spark inflationary problems by creating helicopter money.

Last week leaders from the Group of 20 wealthy and emerging economies agreed to support a general allocation of $250 billion worth of International Monetary Fund's SDRs -- options to tap IMF funds - alongside other measures to boost the Fund's firepower.

Under the plans, countries hit particularly hard by the global economic crisis would be allowed to increase their SDR share by using those of other countries which may not need them.

The results of the G20 summit have been broadly welcomed by policymakers including the ECB's President Jean-Claude Trichet. but Stark questioned whether this decision was needed and had been properly thought through.

That is pure money creation. That is helicopter money for the globe, he told German business daily Handelsblatt in comments later confirmed by the ECB.

There was no examination of whether there is a global need for additional liquidity at all... One used to take a lot of time to examine something like this, he said.

Helicopter money has become a phrase linked to pumping money into the economy as an extreme response to the threat of deflation.

In 2002 Ben Bernanke, then a Federal Reserve governor and now its chairman, gained the nickname Helicopter Ben after he quoted an argument by monetarist U.S. economist Milton Friedman that money should be dropped from helicopters if an economy slid into deflation.

INFLATION RESERVATIONS

Stark is not alone in having concerns about the G20 decisions. IMF chief Dominique Strauss-Kahn acknowledged earlier this week the move to boost the Fund's firepower carried inflationary risks. But he has played down the significance in the current climate.

The only drawback is the inflation risk but it's limited at the moment, he told French newspaper Le Figaro on Monday.

The concerns about future inflation come even as some major economies look closer to deflation.

The financial turmoil and subsequent sharp slump in demand and commodity prices have seen inflation in the euro zone drop to an all-time low of 0.6 percent, well below the ECB's own target of just under 2 percent.

The bank's top policymakers have said that it may turn negative in the coming months but maintain that a more worrying spell of deflation is unlikely.

The ECB has cut interest rates to a record low of 1.25 percent in response to the ongoing problems and analysts expect it to cut them again to 1.0 percent next month, as well as lay out some other alternative plans to help the euro zone our of recession. (For latest Reuters poll please click )

New data on Tuesday showed that the euro zone economy shrank more than previously thought in the last three months of 2008, adding to the stack of recent bleak news.

ECB Governing Council member Ewald Nowotny told Reuters on Monday that economic recovery, expected for next year, would be slow and weak and the bank would have to keep monetary policy expansionary.

The IMF created SDRs in 1969 as a way to support its 185 member countries and they are allocated according to members' IMF quotas, which are broadly based on a country's relative size in the world economy and which determines its voting power.

(additional reporting by Brian Love in Brussels)

(Reporting by Marc Jones; editing by David Stamp/Victoria Main)