ECB chief cautious on Ireland's debt efforts


EUROPEAN CENTRAL Bank president Mario Draghi maintained a cautious public stance yesterday on the Government’s effort to restructure some of its banking debt, saying the State must meet standing contracts and commitments.

While senior euro zone sources say technical work is ongoing on a deal to revise Anglo Irish Bank’s promissory note scheme, Mr Draghi declined two opportunities to say whether he supported Dublin’s campaign.

He was speaking at a press conference after the ECB left its main interest rate steady at a record low of 1 per cent and warned that downside risks to the economic outlook prevail.

With Spanish borrowing costs again on the rise, Mr Draghi said risks centre on “a renewed intensification of tensions in euro area debt markets and their potential spillover” to the real economy.

Rejecting German rumblings about the requirement for an exit strategy in the wake of the ECB’s €1 trillion ultra-cheap loan scheme for euro zone banks, Mr Draghi said that he, as ECB president, was entitled to have the last word on the matter. “Inflation expectations are firmly anchored in the medium term and, in view of the present conditions of output and unemployment, which is at a historical high, any exit strategy talk for the time being is premature.”

He said all necessary tools were available to the bank to address upside risks to price stability “in a firm and timely manner”, an expression the ECB has not used before in relation to inflation.

Mr Draghi denied, however, that he was stepping up his rhetoric on inflation. The ECB aims to keep euro zone inflation below but close to 2 per cent. The rate dropped to 2.6 per cent in March from 2.7 per cent the previous three months.

Asked what he would say to Irish people who were preparing to vote against Europe’s fiscal treaty in next month’s referendum, he said he was “fully confident” that the pact will be passed.

“Ireland and the Irish Government and the Irish people have undergone a very, very hard and harsh fiscal consolidation programme and I would say from all angles they deserve to be praised for their efforts,” he told reporters.

Asked about the promissory note question generally, Mr Draghi referred to an operation last week to redeem a €3.06 billion payment with a Government bond instead of cash.

“We take note of the scheduled end-March redemption of the promissory notes and the subsequent reduction in emergency liquidity assistance provided by the Central Bank of Ireland,” he said. “We expect that future redemptions will be met according to the schedule to which the Government has committed itself.

“As Ireland strives to regain market confidence – and frankly I have few doubts that it will succeed, very few doubts – it is of the utmost importance that the commitments of the Irish State are met in line with standing contracts and agreements.”

Mr Draghi offered no direct comment on talks between the Government and the EU-IMF-ECB troika to replace the promissory notes with European Financial Stability Facility or European Stability Mechanism bailout fund bonds, saying he was simply taking note of the deferral deal.

He described that initiative as a “completely Irish operation” and said the bank believes the Government “has very good chances” to return to private debt markets.

Asked about the decision of Germany’s Bundesbank to stop accepting as collateral bank bonds guaranteed by EU-IMF bailout recipients such as Ireland, Mr Draghi described the money in question as “peanuts” and said the move related to a narrow and restricted set of bonds.

The Austrian central bank said yesterday said it would follow the Bundesbank’s manoeuvre, which comes in the wake of a change to ECB collateral rules, under which national central banks are no longer obliged to accept bank bonds guaranteed by EU-IMF programme countries. He said the two-phase long-term refinancing operation had prevented a new crunch but it was still too early to assess the impact of the second scheme at the end of February.