ANALYSIS:The Government's tentative return to debt markets prompted lavish praise from the ECB chief, writes ARTHUR BEESLEYin Frankfurt
THE EUROPEAN Central Bank has cut interest rates to a record low but it is refusing to yield to demands for a new round of extraordinary measures to ease the turmoil in the euro zone.
It is a measure of the speed at which the debt crisis moves that ECB chief Mario Draghi felt at liberty to cite a modest improvement in market sentiment in recent days. This had no small bearing on the Government’s decision to make a tentative return to debt markets yesterday, prompting lavish praise from Draghi.
In the backdrop, of course, is the latest move by EU leaders to intensify their response to the debacle. In addition to taking steps towards a euro zone banking union, they have resolved to allow direct bailout aid from Europe for Spain’s banks and have freed the European Financial Stability Facility and European Stability Mechanism rescue funds to buy up Italian bonds. The execution of these decisions is riddled with technical and legal complexity, and potential for delay and serious political strife. But this still marks progress.
Draghi made the point in relation to Spain that any increase in its national debt would be but temporary if the European bailout of its banks went ahead before the direct aid could be deployed. This would have an important signalling effect to investors, he said.
At the same time, he avoided answering questions about the significance to Ireland of the push for direct bank aid, or his view of the optimal outcome of the imminent review by euro zone finance ministers of the Irish bank rescue.
What is clear is that the ECB’s stance on Ireland’s banks is evolving. Time was the bank blanked all talk of new arrangements. Last spring, however, it gave tacit support to a deal in which Dublin deferred a €3 billion cash payment to the former Anglo Irish Bank.
The ECB never explicitly backed direct European aid for Irish banks, but Draghi welcomed EU leaders’ decision to go down this road. What is more, ECB executive board member Jörg Asmussen was instrumental in securing a reference to Ireland’s banking rescue in the euro zone communique last Friday morning. Draghi’s introductory statement at his press conference yesterday was weighed down with cautious language about the prevailing sense of “heightened uncertainty” in the euro zone and the materialisation in downside risks to economic growth in recent months. Last month the bank held rates steady even though some of its governors wanted a reduction. The decision to cut rates yesterday was unanimous, Draghi said.
“When we were discussing it a month ago, we couldn’t say that we had the same picture for the whole of the euro area as we have it today. And especially we see now a weakening basically of growth in the whole of the euro area, including the country – or the countries – that had not experienced that before.”
This was a clear reference to the slowdown in the German economy, something with potential to stir trouble in the wider euro zone if it is not quickly reversed.
Still, the overall mood is certainly a little brighter than when the IMF managing director Christine Lagarde warned a fortnight ago that the very viability of the single currency was in question if EU leaders did not radically escalate the battle against the crisis.
Lagarde said then that the ECB should cut rates and give consideration, if necessary, to the reactivation of its bond-buying campaign or another drive to flood the banking sector with cheap three-year money.
She also raised the possibility of the ECB indulging in forms of quantitative easing – ie the printing of money to stimulate demand in the economy.
The ECB holds the view that this last is against the law, and it is at pains these days to avoid a return to bond-buying or another long-term refinancing operation loan plan for banks. If Lagarde’s call for more action from the ECB was unambiguous, Draghi was equally direct on this topic. “We didn’t discuss any other non-standard measures,” he told reporters yesterday in Frankfurt.
“I will also tell you why we didn’t discuss this, because we have to have non-standard measures which are effective and they have to be effective in an area which is fragmented.
“So that’s why it’s not obvious that there are measures which can be effective in a highly fragmented area, even though, as I said before, market sentiment seems to be improving slightly.”
Nevertheless, Draghi rejected the suggestion the bank was running out of policy options. He also sought to redirect attention to the ECB’s decision a fortnight ago to ease its collateral requirement for banks using its emergency liquidity lifeline.
