ECB's Draghi: euro not in danger

ECB's Draghi: euro not in danger



In this July 5, 2012 file …

BERLIN (AP) — The head of the European Central Bank said the euro is "absolutely not" in danger as the continent's financial crisis simmers, and insisted in an interview published Saturday that the multi-nation currency is "irrevocable."

Worries about the 17-nation eurozone's future health have been fueled lately by Greece's persistent troubles and by the financial woes of Spain, the bloc's fourth-biggest economy. European ministers this week signed a rescue package worth up to €100 billion ($122 billion) for its ailing banks, but concern flared about Spain's prolonged recession and the debts of its regions, and the country's borrowing costs rose.

Asked in an interview with French daily Le Monde whether the euro is in danger, ECB President Mario Draghi replied: "No, absolutely not."

When outside analysts draw up scenarios for an "explosion" of the eurozone, "that underestimates the political capital that our leaders have invested in this union, as well as the support of European citizens," Draghi said in the interview, which was posted on the ECB's website.

"The euro is irrevocable," he added.

The ECB this month cut its benchmark interest rate to a record-low 0.75 percent but gave little sign of further action soon to ease the crisis. It already has made two rounds of three-year emergency loans to banks, but has shown little appetite to reactivate its government bond-buying program.

"Our mandate is not to resolve the financial problems of countries, but to ensure price stability and to contribute to the stability of the financial system in full independence," Draghi said in the interview with Le Monde, conducted Wednesday — emphasizing the ECB's primary task of fighting inflation.

Asked whether the ECB should do more to ease the economy, Draghi replied: "We are very open. We do not have any taboos."

He said the ECB decided to cut interest rates in July because it forecast that inflation would be at its target level — close to or below 2 percent — at the start of 2013.

"It now seems likely that it will fall sooner than expected, at the end of 2012," he said. "Our mandate is to maintain price stability in order to prevent both higher inflation and a generalized, broadly based fall in prices. If we see such risks of deflation, we will act."

As for the eurozone economy, Draghi said that the situation "has gradually worsened, but not to the point of plunging the whole of the monetary union into recession."

"We still expect a very gradual improvement in the situation by the end of this year or the beginning of next year," he said.

MORE:

Long live the euro: ECB chief pledges to preserve the united currency



26 July, 2012, 15:54



European Central Bank President Mario Draghi announced the lender would do whatever necessary to protect the eurozone from collapse.
­"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough," he told an investment conference in London. Draghi also promised to intervene to fight unreasonably high government borrowing costs as they “hamper the functioning of the monetary policy transmission channels”.
Draghi’s comments immediately pushed the euro and European stocks up, while the US futures extended gains. The pan-European Stoxx Europe 600 rose 1.5% after swinging between gains and losses at the early session. Indices of debt troubled Italy and Spain also surged with the IBEX 35 rising 2.8% and the FTSE MiB jumped 3.7%.
Meanwhile German bond futures, typically considered as a safe haven, turned negative in response.
On Wednesday, ECB policymaker Ewald Nowotny said there are arguments in favor in giving Europe's permanent rescue fund a banking license, which would allow it to borrow from the ECB. Draghi has been previously opposed the option.

What do bankers do right before a certain event or action? State the exact opposite...probably trying to keep another run on the banks at bay.

Mario Draghi's strong message of support prompted a rally in European share markets and the euro.



In Spain, the Ibex share index closed up 6%, while in Italy, the main share index closed up 5.6%.

The comments also triggered a fall in bond yields. Spain's 10-year yield, which had hit a record high of 7.6% earlier, fell back to 6.8%.

Bond yields are an indication of the interest rate a country would have to pay to borrow money. A rate above 7% is generally seen as unsustainable in the long run.

Earlier in the week, share prices had dived and Spanish bond yields jumped sharply on fears that the debt problems being faced by several of the country's regional governments would push Spain towards a full bailout.

Mr Draghi's comments also boosted the euro, which had been languishing at two-year lows against the dollar earlier this week. It rose 1% to $1.2284.

In other stock markets, the UK's FTSE 100 ended up 1.4%, France's Cac 40 jumped 4.1% and Germany's Dax climbed 2.8%.

On Wall Street, US stocks rose in early trade. The Dow Jones was up 1.5%.

Bond-buying programme
Continue reading the main story
Analysis

Chris Morris

Europe correspondent

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Mr Draghi argued that dealing with high bond yields is the ECB's business, if they start to interfere with the bank's monetary policy and its core task of trying to keep inflation low.

The financial markets have taken this as a hint that the ECB could resume its programme of buying sovereign bonds to try to drive down yields, and to defend Italy and Spain.

The bond-buying programme is controversial. There are those, in the German economic establishment in particular, who argue that it takes the ECB too close to lending money directly to member states, something the Bank is not allowed to do.

So it is likely that Germany and others would only allow bond-buying to resume if it were strictly limited.

Are there other options being discussed?

Well, one senior ECB policymaker suggested this week that the eurozone's new bailout fund could be given a banking licence so it could borrow money from the ECB, and then help out struggling governments itself.

That too, remains, a very contentious idea. But Mr Draghi has now raised market expectations. And, if nothing changes, the backlash could be rather painful.
Speaking at a conference in London marking the start of the Olympics, Mr Draghi said: "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."

Many, investors took that to be a strong hint that the ECB might re-start its Securities Markets Programme (SMP).

The scheme - introduced in 2010 - allows the ECB to buy large quantities of government bonds from banks and other financial institutions on the open market.

That, in turn, allows indebted eurozone governments to borrow money at rates much lower than those offered in the commercial bond markets.

The last SMP purchase took place at the end of January. Since then, Mr Draghi has, repeatedly reiterated his resistance to large-scale bond purchases. The last time was at the ECB's 5 July press conference.

The ECB holds its next interest rate meeting and news conference next week.

'Positive' remarks

An auction of Italian two-year bonds on Thursday saw the interest rate investors demanded to lend to the Italian government rise to an eight-month high of 4.86%.

However, demand for the bonds was strong, and the yield on the benchmark 10-year bond fell back in line with Spain's - another positive sign.

The French finance minister, Pierre Moscovici, said Mr Draghi's remarks on government bond yields were "very positive".

Elsewhere in Europe, the president of the European Commission, Jose Manuel Barroso, is visiting Greece for the first time three years for talks.

Greece, which is the worst-affected country in the eurozone, is also playing host to international monitors from the European Union, the International Monetary Fund and the European Central Bank, who are there to check how it is getting on with its debt-cutting programme - a condition of its bailout loans.

The three, known as the troika, had a two-hour meeting with the Greek finance minister Yannis Stournaras.

A senior official said that the government had identified proposed spending cuts for the next two years, which he said were likely to be presented to the inspectors later on Thursday.

The euro crisis has spread its negative effects even further this week with the credit ratings agency Moody's downgrading the outlook for Germany's AAA credit rating to negative, because of the prospect of it having to provide more help to prop up the single currency.