EUROPEAN CENTRAL Bank chief Mario Draghi declared the bank’s €1 trillion scheme to boost the banking sector a “success”, arguing the initiative has rekindled confidence in the euro and led to tentative resumption of bank lending.
As the ECB held its main interest rates at a historic low of 1 per cent yesterday, he said efforts to tame the turmoil in the euro zone were yielding fruit.
“Both operations I would say are an unquestionable success,” he said of two long-term refinancing operations (LTRO) in the past three months, the latter a week ago. Addressing reporters in Frankfurt yesterday, he also said Europe’s new fiscal treaty was a crucial pillar of the effort to overcome the sovereign debt crisis.
“I think it’s clear to everybody that if countries don’t release some of their national sovereignty about fiscal policy, there is no way they can be together because there is no way we can have a situation where you have one or two countries that pay for everybody,” he said. “There is no way we can have a union where you spend but then we issue bonds together unless you have – and that’s what the fiscal compact does – unless you have a discipline in place, rules in place. These rules are the pillars of trust between countries, this trust is essential for the monetary union.”
Mr Draghi declined to comment on the ongoing Greek debt-swap, which was to finish last night, and said there was no danger of any country leaving the currency.
“We don’t prepare. We don’t have any plan B. To have plan B means to admit defeat. It is equivalent to conceiving a reality which goes beyond the treaty,” he said.
He also brushed off concern from the German Bundesbank about the health of the ECB’s own finances. “We all have to do the right things and we have to do them together. My personal and professional relationship with Jens is excellent,” he said of Bundesbank chief Jens Weidmann.
“We owe a lot of what we have learned about stability culture to the Bundesbank and to Germany.”
In relation to the ECB’s own balance sheet, he said it was “not correct” to say the risks are now higher than the US Federal Reserve or the Bank of England.
Mr Draghi said an ad hoc ECB lending survey shows “there has been a modest pick-up in credit and in bank lending since the first LTRO” in December.
He rejected criticism of the initiative and said former ECB executive board member Jürgen Stark, who has expressed concern about the bank’s balance sheet, had himself voted for the LTRO initiative.
“Basically the LTRO had a powerful effect of removing what’s called tail risk from the environment. So when people say the LTRO could make the banking system more dependent from the ECB, they forget that there was no interbank market.
“There were no interbank markets before, they were completely clogged. So if anything we are actually witnessing the opposite now. We see markets that are gradually reliquifying themselves.”
He acknowledged delays in the effort to boost the euro zone bailout funds, something the ECB has been seeking. “Some members of the IMF have made quite clear that they would be ready to commit more resources from the IMF general resource account only if an adequate firewall were in place,” he said. “At the same time, the building of an adequate firewall has to take into consideration that many different budget situations. That’s why it is taking so long.”
