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Central Bank Actions Have ‘Alleviated Tensions’ in Euro Zone, President Says Central Bank Actions Have ‘Alleviated Tensions’ in Euro Zone, President Says
(about 5 hours later)
The president of the European Central Bank gave a guardedly upbeat assessment of the situation in the euro zone Thursday, saying that troubled countries had made “significant progress” remaking their economies and that the banking system was healthier. BERLIN — The president of the European Central Bank gave a guardedly upbeat assessment of the state of the euro zone on Thursday, saying that troubled countries had made “significant progress” remaking their economies and that the banking system was healthier.
“So, not bad,” Mario Draghi said, with an air of distinct satisfaction, at a press conference in the Slovenian capital of Ljubljana following a meeting of the bank’s governing council. “So, not bad,” the president, Mario Draghi, said with an air of apparent satisfaction, at a news conference in Bled, near the Slovenian capital of Ljubljana, after a meeting of the bank’s Governing Council.
But, perhaps wary of seeming too optimistic and encouraging complacency by elected officials, he added that the state of the euro zone remained tenuous. Early this year, Mr. Draghi also called a turning point in the crisis, only to see tensions return with a vengeance later on. But, perhaps wary of seeming too optimistic and encouraging complacency, Mr. Draghi added that matters remained tenuous. Early this year, Mr. Draghi had also called a turning point in the crisis only to see tension return with a vengeance later on.
After a period of intense activity to calm the euro zone crisis, the E.C.B. had not been expected to announce major new policy actions Thursday. And, as expected, the bank left its benchmark interest rate at a record-low 0.75 percent. “We also have to express a note of caution,” he said. “Volatility is still relatively high. And governments will have to persevere on their reform action.”
Instead, the focus has been on elected leaders, and particularly whether Spain will meet conditions for the E.C.B. to start buying its bonds as a way of restarting bank lending in the country. After a period of intense activity, the E.C.B. had not been expected to announce major new policy actions Thursday. And, as expected, the bank left its benchmark interest rate at a record low of 0.75 percent.
Mr. Draghi asserted that the E.C.B.’s promise to buy bonds in so-called Outright Monetary Transactions had “helped to alleviate tensions” in the markets. Instead, the focus has shifted to Europe’s elected leaders, and particularly whether Spain will meet conditions under the terms of an agreement for aid that the E.C.B. has stipulated are necessary for it to start buying its bonds as a way of restarting bank lending in the country.
He added that the bond purchases, once they begin, “will enable us to provide, under appropriate conditions, a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area.” Finance ministers of the 17 euro zone countries will meet next week, creating an opportunity for Spain to apply for assistance, though many analysts expressed reservations that Madrid would move that quickly, as it is balking at conditions it would have to agree to in exchange for drawing from one of the euro zone’s rescue funds. That is one of the steps required by the E.C.B. before it will buy bonds.
But he also called on governments to do their part to continue to make progress on overhauls of national economies and the structure of the euro zone. Spain’s European partners are also conflicted over whether Madrid should apply for assistance. The Germans have been the most reluctant, with Finance Minister Wolfgang Schäuble insisting that Spain was taking the right steps and did not need a bailout. Media reports have also cited bailout fatigue among members of the German Parliament, which has to approve each application for aid.
And he warned that, if the E.C.B. began buying bonds to help a euro zone country hold down borrowing costs, the bank would cut off aid if countries failed to meet agreed conditions. Elsa Bartsch, the chief European economist with Morgan Stanley, said the E.C.B. seemed to be making clear that it had gone as far as it was prepared to go in restoring market confidence and that it was now up to the governments of Europe to push through restructuring efforts that are seen as necessary to restore the euro’s stability in the long term. “The ball is now clearly in the courts of the governments,” Ms. Bartsch said.
Last month, Mr. Draghi set out the terms for the central bank to begin buying euro zone government bonds. One of the conditions was that countries must request help from the euro zone bailout fund. Until Spain takes that step, the E.C.B. is not likely to take action. Mr. Draghi asserted that the introduction last month of the E.C.B.’s program to buy bonds had “helped to alleviate tensions” in the markets. Yields on short-term bonds have dropped considerably since the bank began taking a more activist stance. He added that the bond purchases, once they began, “will enable us to provide, under appropriate conditions, a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area.”
The E.C.B. promise last month to intervene in bond markets, as well as Mr. Draghi’s vow to do “whatever it takes” to preserve the euro, has calmed tensions considerably. But market interest rates for Spanish bonds have been creeping higher in recent weeks as Prime Minister Mariano Rajoy delays asking for relief, a move which would require him to accept restrictions on how he manages the economy. Yet some experts feel that the E.C.B.’s assessment is overly optimistic and that it was too early to speak of a breakthrough: After all, until a country activates the bond-buying program, there is no proof that it will work as intended.
On Thursday, the Spanish Treasury successfully auctioned €4 billion of debt, the maximum amount that it had aimed to sell, amid strong demand and paying lower interest rates than when it last sold such bonds. “We need to see whether governments can deliver on the program’s conditions and whether the populations accept the change,” Karen Ward, an economist with HSBC, wrote in a research note.
Analysts cautioned, however, into reading too much into the positive result. In his comments, Mr. Draghi repeated the need for governments to uphold their commitment to overhaul their economies and the structure of the euro zone for any improvement to be lasting.
Nicholas Spiro, managing director of Spiro Sovereign Strategy, a research concern, wrote Thursday in a note that investors were “taking an overly optimistic view” of the eventual effectiveness of the E.C.B. bond-buying program. He further warned that the E.C.B. would stop purchasing a country’s bonds of a country to help lower its borrowing costs if the country failed to meet the agreed-upon conditions.
Last month, Mr. Draghi set out the terms for the central bank to begin buying euro zone government bonds. One of the conditions was that countries must first request help from the euro zone bailout fund, the European Stability Mechanism, which has now been ratified and is to take effect in the near future, or its predecessor, the European Financial Stability Facility.
That promise to intervene in bond markets, as well as Mr. Draghi’s vow to do “whatever it takes” to preserve the euro, has calmed tension considerably. But interest rates for Spanish bonds have been creeping higher in recent weeks as Prime Minister Mariano Rajoy delays asking for relief, a move which would require him to accept restrictions on how he manages the economy.
On Thursday, the Spanish Treasury successfully auctioned €4 billion, or $5.2 billion, of debt, the maximum amount it had aimed to sell, paying lower interest rates than when it last sold such bonds. But analysts said it was too early to read too much into the positive result.
Nicholas Spiro, managing director of Spiro Sovereign Strategy, a research firm, wrote Thursday in a note that investors were “taking an overly optimistic view” of the potential effectiveness of the E.C.B. bond-buying program.
“Spain’s debt market is currently in a state of limbo,” he wrote. “It is being propped up by an E.C.B.-backed bond-buying scheme that has yet to be put into practice.”“Spain’s debt market is currently in a state of limbo,” he wrote. “It is being propped up by an E.C.B.-backed bond-buying scheme that has yet to be put into practice.”
In his remarks Thursday, Mr. Draghi presented a somewhat rosier picture of the situation in the euro zone, saying that “significant progress” has been made in countries like Spain and Portugal. He also noted that weaker banks in the euro zone had bolstered their capital cushions. In his remarks Thursday, Mr. Draghi presented a somewhat rosier picture of the situation in the euro zone, saying that significant progress had been made in countries like Spain and Portugal. He also noted that weaker banks in the euro zone had bolstered their capital cushions.
“When I said there has been significant progress, I included the repairing of the banking system,” Mr. Draghi said. “The capitalization gap that was pretty wide a couple of years ago has been significantly reduced.”“When I said there has been significant progress, I included the repairing of the banking system,” Mr. Draghi said. “The capitalization gap that was pretty wide a couple of years ago has been significantly reduced.”
Mr. Draghi ticked off a number of signs that the crisis has eased, including inflows of bank deposits to Italy and a rise in bond sales by banks and corporations, which should help investment and lending. He also said that Spanish banks had become less dependent on lending from the E.C.B., a possible sign they are able to raise funds on markets. Mr. Draghi ticked off a number of signs that the crisis had eased, including an increase of inflows of deposits to Italian banks and a rise in bond sales by banks and companies, which should help investment and lending. He also said that Spanish banks had become less dependent on lending from the E.C.B., a possible sign they were able to raise funds on markets.
But he added, “We also have to express a note of caution. Volatility is still relatively high. And governments will have to persevere on their reform action.” Mr. Draghi also reiterated his view, which some euro countries have questioned, that the central bank’s actions to shore up the euro fell squarely within its purview.
Mr. Draghi also reiterated his view, which some euro countries have questioned, that the central bank’s actions to shore up the euro fall squarely within its purview.
“Let me repeat again what I have said in past months,” he said. “We are strictly within our mandate to provide price stability over the medium term, we act independently in determining monetary policy, and the euro is irreversible.”“Let me repeat again what I have said in past months,” he said. “We are strictly within our mandate to provide price stability over the medium term, we act independently in determining monetary policy, and the euro is irreversible.”
From the E.C.B.’s point of view, there would have been little point in further cutting the main interest rate from 0.75 percent. Rates are already probably too low for stronger countries like Germany, while the official rate is no longer having much effect on borrowing costs for business and consumers in the troubled countries. The euro rose against the dollar after Mr. Draghi’s comments, reaching a two-week high of $1.2990.
In addition, a rate cut now would have left the E.C.B. with few policy options if the situation in the euro zone deteriorates further. From the E.C.B.’s point of view, there would have been little point in cutting further the main interest rate from 0.75 percent, and Mr. Draghi said there had been no discussion of a possible cut.
“While a rate cut could easily be justified by the economic outlook,” analysts at ING wrote in a note Wednesday, “we think that the E.C.B. is not yet willing to fire this very last shot.” The E.C.B.’s rate decision came several hours after the Bank of England kept its main interest rate at a record low of 0.5 percent and opted not to take any immediate measures to stimulate growth.
Raphael Minder contributed reporting from Madrid. The bank said it would take another month to complete the £375 billion, or $605 billion, program, and the scale of the program would be kept “under review.”
Raphael Minder contributed reporting from Madrid, and Stephen Castle from Brussels.