Draghi warns on euro zone

Fri, Jun 15, 2012, 01:00

The euro zone economy faces serious risks and no inflation threat, European Central Bank president Mario Draghi said today in comments that heightened expectations the ECB could cut interest rates soon.

Mr Draghi also said the ECB was ready to provide further liquidity to solvent banks. Financial markets are looking to the ECB to take the fast and decisive action the euro zone's governments have been unable to muster to tackle the bloc's crisis, which risks spiralling to a new intensity after knife-edge Greek elections on Sunday.

"There are serious downside risks here," Mr Draghi told the annual ECB Watchers conference in Frankfurt. "This risk has to do mostly with the heightened uncertainty."

His comments came just days after other policymakers said the central bank might be open to cutting interest rates. The ECB left its main interest rate at 1 per cent last week.

Authorities in Europe have laid plans for managing the damage if, for instance, a decisive victory on Sunday for the Syriza party, which has promised to tear up Greece's bailout deal, prompted Greeks to empty their bank accounts.

Mr Draghi said today the eurosystem of euro zone central banks would "continue to supply liquidity to solvent banks where needed."

Another ECB policymaker, executive board member Peter Praet, said the ECB's crisis measures, such as the long-term refinancing operation, could continue to help the situation and stressed that they were not fuelling inflation - the traditional fear of euro zone paymaster Germany.

Mr Draghi said: "The ECB has the crucial role of providing liquidity to sound bank counterparties in return for adequate collateral. This is what we have done throughout the crisis, faithful to our mandate of maintaining price stability over the medium term - and this is what we will continue to do."

The head of the ECB kept the onus on politicians to stop the crisis spiralling, saying: "We have reached a contingency where political choices have become predominant over monetary instruments that we can use in the near future."

He spoke after other central banks from major economies said they stood ready to take steps, including co-ordinated action, to stabilise markets as world economies prepare for a possible financial storm or public panic after the Greek vote.

Mr Draghi added said inflation expectations were well anchored and "there is no inflation risk in any euro area country".

Spanish and Italian bonds climbed, trimming a weekly slump, amid speculation global policy makers will take action to combat the risks from Europe's debt crisis after Spain's 10-year yields approached 7 per cent yesterday.

Spain's 10-year yield fell five basis points, or 0.05 percentage point, to 6.87 per cent after rising to 6.998 per cent yesterday, the highest since the euro was introduced in 1999. Italian 10-year yields fell 15 basis points to 5.98 per cent, trimming their weekly advance to 21 basis points.

The number of people in work in the euro zone fell again in the first three months of this year, according to new figures published this morning.

Employment in the 17 nations sharing the euro fell 0.2 per cent in the first quarter from the fourth, marking the third straight quarter of falling job rates.

Elsewhere, a report today showed euro zone exports declined for a second month in April, adding to signs of continued weakness in the common economy.

Exports from the region fell a seasonally adjusted 1.3 per cent from March, when they dropped 1 per cent, the European Union's statistics office said today.

Greece's benchmark bonds rose as the nation prepared for the election in two days time that will likely decide its future.