ECB ready to aid states in trouble, says Draghi

Fri, Oct 5, 2012, 01:00

EUROPEAN CENTRAL Bank chief Mario Draghi declared the bank’s readiness to buy up sovereign bonds if Spain or any country seeks such aid. He also ruled out any easing of repayments on the bank’s holdings of Greek bonds.

As the ECB held its main interest rate steady at a record low of 0.75 per cent, Mr Draghi reported a “substantial, significant improvement” in credit market conditions since the ECB announced its new bond-buying scheme last month.

Known officially as the outright monetary transactions (OMT) initiative, the scheme cannot be triggered without a formal application for assistance by the member state.

Although Mr Draghi revealed nothing about the timing of any approach from Spain, he saw “good news” in the fact that the country has already raised 90 per cent of this year’s funding requirement.

He would not say whether Spanish bond yields were at appropriate levels and said it was for the Spanish government and all governments to decide what they wanted to do.

“I could say that today we are ready with our OMT.

“We have a fully effective backstop mechanism in place,” Mr Draghi said.

“The decision is entirely in the hands of governments. “The ECB has done what was possible and the OMT would create an environment which is conducive to reforms . . . but the initiative is in the hands of governments.”

Amid concern in Madrid that any extension of the European aid plan for its bank would draw unpopular harsh conditions, Mr Draghi said the plan did not need to be “necessarily punitive”.

“Actually many of the conditions have to do with structural reforms, which have both social cost but also great social benefits.”

At the same time, he dismissed the notion that the ECB could reschedule the repayments on its Greek bonds to reduce the burden on Athens as it negotiates a difficult financial plan with the EU-ECB-International Monetary Fund “troika”.

Such a move would be illegal in EU law, he suggested.

“We’ve said several times that any voluntary restructuring of our holdings would be equivalent – would be monetary financing.”

The ECB chief said it was for euro zone governments to deal with the declaration by Germany, Finland and the Netherlands that the new European Stability Mechanism should not bear historic bank losses.

The manoeuvre last week threw doubt over the potential scope of any deal in which the ESM would take shares in AIB, Bank of Ireland and Permanent TSB.

“We’ll have to assess exactly what it means and I don’t want to prejudge the technical discussion that will take place,” Mr Draghi said.

“This is not a matter for the ECB. It’s a matter for the governments concerned.

“It’s taxpayers’ money, so they will have to discuss and take a stance on exactly what is meant by legacy assets.”

Mr Draghi, who was not asked about the situation in Ireland, said nothing about the ECB’s talks with the Government to recast the Anglo Irish Bank promissory note scheme.

There was no discussion concerning a possible interest rate cut, he said.

Although the inflation rate is expected to remain above 2 per cent throughout 2012, the ECB believes it will drop below that level “in the course of next year”.

The ECB aims to keep inflation below but close to 2 per cent in the medium term.

“Economic growth in the euro area is expected to remain weak, with ongoing tensions in some euro area financial markets and high uncertainty still weighing on confidence and sentiment,” Mr Draghi said.

“Our decisions as regards OMTs have helped to alleviate such tensions over the past few weeks, thereby reducing concerns about the materialisation of destructive scenarios.”

Soul searching: Bundesbank and ECB in sync, insists Draghi

The ECB meeting took place at Brdo pri Kranju outside Ljubjana, where then US president George W Bush said in 2001 that he had looked into the eye of Russian president Vladimir Putin and got “a sense of his soul”.

This prompted an inevitable question to ECB chief Mario Draghi as to whether he had seen the soul of Bundesbank leader Jens Weidmann, an avowed opponent of the ECB’s new bond-buying scheme.

“I would like to know from you who is Putin, who is GW Bush?” replied a laughing Draghi. “I can say that the discussion was – I don’t want to comment on individual positions, of course – but the discussion was very constructive.”

Weidmann was the only dissenter on the ECB governing council when the bank decided last month to proceed with its outright monetary transactions initiative. The Bundesbank man drew parallels between the scheme and Goethe’s Faust, saying the play underlined the “potentially dangerous correlation” of paper money creation, state financing and inflation.

However, Draghi flipped away a question as to whether the ECB was in sync with the Bundesbank, as he himself had promised when taking the helm of the bank last year. “If the tradition of the Bundesbank was to assure price stability, the ECB is fully in sync with that tradition.”