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Central Bank Chief Says Euro Rise Is Sign of Confidence E.C.B. President's Comments Send Euro Lower
(about 2 hours later)
FRANKFURT — The recent rise of the euro is an expression of confidence in the euro zone, the president of the European Central Bank, Mario Draghi, said Thursday, reinforcing the bank’s view that the 17 nations that share the currency will emerge from recession later this year. FRANKFURT — The president of the European Central Bank on Thursday cited the rising value of the euro currency as a possible threat to the region’s economic recovery, comments that immediately sent the euro down sharply against the dollar and yen.
In recent weeks, the euro has risen substantially against the dollar, to the highest levels in a year. On Thursday, it had dropped to $1.33 from nearly $1.36; back in July, it was trading at just above $1.21. European stock markets and indexes on Wall Street also fell after Mr. Draghi’s remarks. Mr. Draghi denied that the E.C.B. was trying to influence the value of the euro, no doubt mindful of provoking a currency war with Japan or the United States. But he then made statements that markets interpreted as meaning the E.C.B. could take action if the euro rose too much.
Recent data and surveys of business sentiment have raised expectations that the euro zone could be slowly recovering, although there is also concern that the rising value of the euro against the dollar could undercut the fragile gains by making euro zone products more expensive for foreign buyers. “The exchange rate is not a policy target, but it is important for growth and price stability,” Mr. Draghi told reporters.
The E.C.B. left its main rate at 0.75 percent, as expected, where it has been since July. In a press conference following the interest rate announcement in Frankfurt, Mr. Draghi took the positive road. His news conference came after the regular monthly monetary policy meeting of the E.C.B.’s Governing Council, in which the central bank left its main interest rate, as expected, at 0.75 percent.
“The appreciation is, in a sense, a sign of return of confidence in the euro,” he said. Separately, the Bank of England kept its benchmark interest rate unchanged at 0.5 percent on Thursday amid concerns that the British economy could fall back into a recession for the third time in five years. The pound has been falling against the euro and the dollar this year amid investor concerns that the British economy would not manage to recover anytime soon.
Mr. Draghi said the E.C.B. would monitor the impact of a strengthening euro on the currency bloc’s economy and on inflation, but he said that bringing down the euro’s value was “not a policy target,” adding that the exchange rate was close to its long-term average. Mr. Draghi, during his E.C.B. news conference, was careful to avoid any explicit threat to take action to push down the euro, or to criticize any other countries. He said the euro’s current value was not far from its historical norm. But he noted that economic policy by other countries — none of which he named — could affect exchange rates.
Few analysts had expected the E.C.B. to shift its monetary policy at this meeting. Some predict that the benchmark rate could stay at its present level for an extended period as the euro zone slowly returns to growth. “Draghi’s biggest challenge was to show his magic skills of verbal interventions and to talk down the euro exchange rate,” Carsten Brzeski, an analyst at ING Bank, wrote in a note to clients. “He succeeded.”
“We expect interest rates to be on hold at 0.75 percent until 2017 and only significant changes in the economic environment would trigger a change one way or the other,” Marie Diron, senior economic adviser to the consulting firm Ernst & Young, said in an e-mail before the decision. Having traded at nearly $1.36 to the dollar earlier on Thursday, the euro dropped to below $1.34 after Mr. Draghi’s comments. Back in July it was trading just above $1.21.
Mr. Draghi also denied suggestions that he had been lax in his oversight of the scandal-hit Monte dei Paschi. The bank, one of Italy’s largest, has required a €3.9 billion bailout by the Italian government. Mr. Draghi was governor of the Bank of Italy, responsible for bank supervision, during the period when Monte dei Paschi was getting in trouble several years ago. Its record high of just below $1.60 was reached in April 2008, when the U.S. banking crisis was gathering steam.
In his first public comments on the crisis, Mr. Draghi said that the Bank of Italy had “done everything it should and appropriately and on time.” He said much of the criticism of the central bank was due to “noise” ahead of national elections this month. Recent data have supported the E.C.B.’s view that the euro zone will emerge from recession later this year, a view Mr. Draghi repeated Thursday. German industrial production rose 0.3 percent in December from November, according to data published Thursday, reversing a decline the previous month and signaling a pickup in the euro zone’s largest economy.
Mr. Draghi’s supporters have pointed out that there was a deliberate attempt by that bank’s previous management to conceal the extent of their losses, and that the Bank of Italy did not have the authority to prevent Monte dei Paschi managers from making foolish decisions. Part of the bank’s problems stem from its acquisition of regional bank Antonveneta in 2008 for €9 billion, a price considered much too high even at the time. But the recovery is threatened by the rising value of the currency used by 17 European countries, which could hurt exports by making euro zone products more expensive for foreign buyers. In recent weeks, the euro has risen substantially against the dollar, to the highest levels in a year.
But at the very least, the case of Monte dei Paschi has illustrated the limits of bank supervision, and called into question whether the E.C.B. will be able to do a better job than national supervisors when it begins assuming supreme regulatory authority over banks in the course of this year. Few analysts had expected the E.C.B. to shift its monetary policy Thursday. Some predict that the benchmark rate could stay at its present level for an extended period as the euro zone slowly returns to growth.
The problems at Monti dei Paschi bank have also been exploited by Silvio Berlusconi, the former prime minister of Italy, as he attempts a comeback in elections at the end of this month. Mr. Berlusconi has run a populist campaign promising to undo some of the economic changes made by his successor, Mario Monti. However, Mr. Draghi’s also emphasized Thursday that inflation is headed below the E.C.B.’s target of about 2 percent. The lack of price pressure would allow the E.C.B. space to cut rates if it chose.
Italian politics aside, international investors are concerned about the new jitters the debacle could create in euro zone bond markets, which have calmed considerably lately. Mr. Draghi argued that the appreciation of the euro “is a sign of return of confidence.” Some analysts said it may take a bigger rise in the currency’s value before the E.C.B. would consider taking action, such as a cut in the benchmark interest rate.
“A government may well be formed on a platform that rejects some, if not most, of the Monti government’s fiscal reforms,” Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, wrote in a note to clients Wednesday. “As uncertainty grows, the bond markets are becoming increasingly unsettled.” A stronger euro means that products ranging from cars to wine become more expensive abroad, putting European producers at a disadvantage to foreign competitors. But there are also positive effects. Imports, particularly oil, become less expensive for Europeans, which helps stimulate the economy.
Despite persistent questioning, Mr. Draghi resolutely declined to offer any information about the central bank’s role, in any, in helping Ireland to reduce its interest payments through a restructuring of the debt of the former Anglo Irish Bank. “The main factor behind the euro strength is the easing of the sovereign debt crisis, which is clearly positive for the euro-zone growth,” Jörg Krämer, chief economist at Commerzbank, said in a note. “The E.C.B. is likely to tolerate further euro appreciation and is quite unlikely to cut rates again.”
The Irish Parliament approved legislation early Thursday to recapitalize the bank, after negotiations with the European Central Bank over swapping so-called promissory notes, which were used to bail out the Irish lender in 2009, for long-term government bonds. During the news conference, Mr. Draghi deflected persistent questioning about a deal that Ireland’s central bank announced Thursday, in which the Irish bank said the E.C.B. had agreed to stretch out the payback for the 2009 bailout of Anglo Irish Bank — to 40 years, instead of the 10 years previously scheduled.
The Irish Parliament approved legislation early Thursday to liquidate Anglo Irish Bank, after negotiating with the E.C.B. to swap the so-called promissory notes used to bail out the Irish lender for long-term government bonds.
Mr. Draghi said the E.C.B. governing council merely “took note” of the Irish action. But he refused to provide any details.Mr. Draghi said the E.C.B. governing council merely “took note” of the Irish action. But he refused to provide any details.
The E.C.B. president may have wanted to avoid any impression that the central bank was giving a financial break to the Irish government. The E.C.B.’s charter prohibits it from financing euro zone governments.The E.C.B. president may have wanted to avoid any impression that the central bank was giving a financial break to the Irish government. The E.C.B.’s charter prohibits it from financing euro zone governments.
Mr. Draghi did, however, applaud efforts by the Irish government to restore growth and get government finances under control. “All in all the outlook is very positive,” he said.Mr. Draghi did, however, applaud efforts by the Irish government to restore growth and get government finances under control. “All in all the outlook is very positive,” he said.
Mark Scott contributed reporting from London. Mr. Draghi also strenuously defended himself against criticism that, in his previous job as governor of the Bank of Italy, he had not done enough to prevent problems at Monte dei Paschi di Siena, which has required a €3.9 billion bailout by the Italian government.
Mr. Draghi was governor of the Italian central bank, responsible for bank supervision, during the period when Monte dei Paschi was getting in trouble several years ago. Former Prime Minister Silvio Berlusconi, with whom Mr. Draghi has tense relations, has tried to capitalize on the issue during the current Italian election campaign.
Mr. Draghi said the Bank of Italy had done all it could, and noted that it lacked powers to remove managers at Monte dei Paschi or pursue criminal wrongdoing.
“You should certainly discount much of what you hear and read as part of the regular noise that elections produce,” Mr. Draghi said.
Julia Werdigier and Mark Scott contributed reporting from London.