By Paul Carrel and Paul Taylor
DAVOS, Switzerland Jan 27 The European
Central Bank's new round of loans to banks have averted a major
credit crunch but credit remains seriously impaired in parts of
the euro area, ECB President Mario Draghi said at the World
Economic Forum in Davos on Friday.
He also said the risk premium on euro zone government bonds
was likely to remain high for an extended period, despite budget
deficit cuts, economic reforms and moves to strengthen Europe's
fiscal discipline and financial firewalls.
Draghi said it was not yet clear whether the nearly 500
billion euros the ECB pumped into the banking sector in a cheap
three-year liquidity operation was filtering through to
companies and consumers.
"So we know for sure that we have avoided a major, major
credit crunch, a major funding crisis," he said.
"Do we know that actually this money is going to finance the
real economy? We don't have evidence of this yet. We have to
wait. There is a lag. In the meantime, you have parts of the
euro area where credit is more or less normal. You have (other)
areas where credit is seriously impaired."
The Italian ECB chief, who has just marked his first 100
days in office, said last month's flood of cheap money had also
had some impact in easing tension on the government bond market,
but it had not yet persuaded banks to lend to each other.
"There was some response on the sovereign (bond market)
side, but we have to see yet one key thing: we have to see the
reactivation of the interbank market. We have to see that banks
trust each other to the point that they go back to lending to
each other and don't have to go through the central bank to lend
to each other."
Financial markets had underpriced the risk of difference
European government's debt for a decade and then gone too far in
the opposite direction, he said.
"As much as spreads underpriced government risk for many
years, now they are overshooting government risk quite a lot and
this may go on for quite a while," Draghi warned.
He praised governments in the 17-nation euro area for making
progress towards stricter enforcement of budget discipline
rules, foregoing part of their national sovereignty, and moving
forward with structural economic reforms.
"The fiscal compact, this set of rules at treaty level are
very important because (they) basically subtract from national
sovereignty part of the fiscal policy discretion," he said.
"This is necessary for the countries of the euro area to go
back to trust each other. This treaty is important because it's
the first step - though timid, though hesitating - towards a
Draghi underlined that the central bank was as committed to
preventing inflation from undershooting as it was to fighting
excessive price rises, recalling its goal of annual inflation
below but close to 2 percent.
In Madrid, ECB policymaker Jose Manuel Gonzalez-Paramo said
the bank has not committed to any minimum level of interest
Asked during an interview on Spanish state television if the
ECB could cut base rates further from their current record low
of 1.0 percent, Gonzalez-Paramo said the bank would go lower if
"Interest rates will be as high or as low in Europe as they
have to be to ensure price stability, and we have not committed
to a minimum level in the slightest," he said.
Economists expect the ECB will cut rates to 0.75 percent in
the next couple of months and some believe they could go as low
as 0.5 percent before the middle of the year.
New lending data published by the central bank made
concerning reading on Friday, showing that the euro zone was
sliding towards a credit crunch just before the ECB took the
drastic step of pumping half a trillion euros into the banking
system at the end of December.
Loans to companies fell at the fastest pace on record in
December, as banks and firms recoiled from an intensification of
the euro zone's crisis. [ID:nL5E8CR1E6 ]