Draghi dismisses ECB exit talk as premature

FRANKFURT Wed Apr 4, 2012 4:54pm EDT

European Central Bank (ECB) President Mario Draghi attends the monthly news conference in Frankfurt April 4, 2012. REUTERS/Kai Pfaffenbach

European Central Bank (ECB) President Mario Draghi attends the monthly news conference in Frankfurt April 4, 2012.

Credit: Reuters/Kai Pfaffenbach

FRANKFURT (Reuters) - European Central Bank President Mario Draghi dismissed a German-led push for the bank to start planning a retreat from emergency crisis-fighting, but stressed it was keeping a close eye on price pressures.

After holding interest rates at a record low of 1.0 percent on Wednesday, Draghi said "downside risks to the economic outlook prevail" and the ECB would need time to see the full impact of bumper funding operations it has used to help banks.

The ECB has pumped over 1 trillion euros into the financial system with the twin 3-year funding operations, or LTROs, to head off a credit crunch that late last year risked exacerbating the euro zone crisis and jeopardizing the currency project.

Draghi dismissed the push to begin preparing an exit from the ECB's crisis mode - a drive led by Bundesbank President Jens Weidmann, with whom Draghi has stressed in recent months he has an excellent relationship.

"Given the present conditions of output and unemployment, which is at historical high, any exit strategy talking for the time being is premature," he said, adding bluntly: "I think the president of the ECB is the one who has the last word on this."

Draghi's sober message on the state of the economy followed a batch of grim economic indicators which have heightened concerns that 17-country euro zone economy is in recession.

He said the policymakers did not discuss changing rates. However, in his opening statement Draghi sought to assuage German concerns that the wall of money unleashed by the twin LTROs could stoke inflation pressures.

"All our non-standard policy measures are temporary in nature," he told the regular post-meeting news conference. "All the necessary tools are available to address upside risks to medium-term price stability in a firm and timely manner."

The German-led group of policymakers is concerned that the LTROs risk stoking inflation pressures.

Euro zone inflation eased to 2.6 percent in March - above the ECB target of just below 2 percent and higher than expected - but the weak economic picture meant the ECB could not afford to signal a rate rise or an exit from the funding measures.

The slump means that even though inflation has proved to be stickier than forecast, the ECB is not about to tighten policy any time soon. It had to reverse two rate rises last year as the crisis came back with a vengeance and will be careful not to repeat the mistake of abandoning its low-rate policy too soon.

"I don't think I'm stepping up my rhetoric on inflation," Draghi said, though he identified inflationary pressures coming from higher oil prices and indirect taxes.

Financial market analysts nonetheless detected a shift in tone if not in substance of monetary policy.

"There was in general a more hawkish slant in the tone of today's ECB press conference," said Julian Callow at Barclays Capital. "It appears that the Governing Council has become more concerned about the risk of inflation pass-through from stronger commodity prices."


For a package of ECB graphics, click:




While he stressed the downside risks to the economy, Draghi was relaxed about in his response to questions about a rise in yields on sovereign bonds issued by Spain - the euro zone's fourth-largest economy.

Just last month he said the worst of the crisis was over, and he did not appear concerned about the jump in Spanish borrowing costs at bond auctions on Wednesday, which spread fear in wider European markets and overshadowed a successful step back into debt markets by neighbouring Portugal.

Spanish risk premiums have leapt since Prime Minister Mariano Rajoy defied Europe in early March by unilaterally easing Madrid's 2012 deficit target.

This rise showed financial markets expected governments on the euro zone periphery to deliver reforms, Draghi said, putting pressure on those countries to shape up rather than looking to the ECB to act further.

"Markets are asking these governments to deliver," he said.

Madrid is battling to convince European partners and debt markets it can rein in its budget deficit in the face of growing complaints from the public.

Draghi also kept up pressure on Ireland and Greece - two countries already on EU/IMF aid programs that Spain is desperately struggling to avoid tapping.

Ireland must keep to existing commitments on future payments due on the high-interest funding given to its crisis-hit banks, he said.

Ireland is enjoying an interest holiday on promissory notes it issued to help rescue its banking system after the 2008 financial crisis. It has to pay 490 million euros in interest by next April.

Turning to Greece, Draghi said some Greek banks may lose access to the ECB's funding operations while they are being recapitalized and will have to rely on the Greek central bank's emergency liquidity assistance facility (ELA) for liquidity.

He played down concerns that the ECB's funding operations have made banks too dependent on its loans, saying: "We don't see any sign that banks are being addicted to the ECB."

(Editing by Jeremy Gaunt)

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Comments (2)
PseudoTurtle wrote:
In the article it states “Draghi sought to assuage German concerns that the wall of money unleashed by the twin LTROs could stoke inflation pressures”, but there is no way Draghi can be correct.

The Germans are absolutely right in stating that what the ECB is doing is inflationary. Any QE program, including that of the Fed in the US, is by its very nature inflationary.

While a QE program avoids the immediate stigma of outright printing money to increase liquidity, along with the immediate inflationary results that are easily observed, a QE program “capitalizes” the debt as inflation on the sovereign balance sheet for release later, which tends to obscure the inflationary nature of what is being done.

Thus inflation is merely delayed, but not eliminated at all.

Apr 04, 2012 10:15am EDT  --  Report as abuse
PseudoTurtle wrote:
My comment above is based on a new theory of “debt as money” that goes beyond the concept of fiat money, in which debt becomes transformed into money, and can thus be “capitalized” on a sovereign balance sheet as an asset, rather than a liability, which would otherwise not be possible. So, right now, the global economy is actually one massive speculative bubble, based entirely on debt, which is about to collapse at the slightest “pin prick”.

For an interesting view of debt as an asset, I suggest you read this article, since it explains this concept far better than I can in this limited space:

“Money’s Failing Heart” by Doug Noland, Asia Times Online, Feb 28, 2012.


This is an excerpt from that article:


“Money” is not foremost a creature “ultimately created by the government”, but is instead primarily an issue of market perceptions. “Money” is as money does (“economic functionality”). The reality is that we today operate in an age of globalized electronic credit – a comprehensive virtual web of computerized general ledger debit and credit entries linking creditors and debtors round the globe.

This “system” of electronic IOUs comprises myriad types of financial obligations of diverse structure, maturity, creditworthiness and currency units of accounts. Importantly, if the marketplace perceives that a credit instrument will act as a highly liquid and stable store of nominal value, this credit enjoys “moneyness”. It is the nature and nuances of contemporary marketable debt – especially with respect to the prominence of governmental and central bank support – that should be the analytical focal point.

A static view of government-based “fiat money” is anachronistic.

Apr 04, 2012 11:12am EDT  --  Report as abuse
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