Tags: ECB | Draghi | Eurozone | risks

ECB Chief Warns of Growing Economic Risks, Pressures Governments

Wednesday, 06 Jun 2012 08:54 AM

The European Central Bank put the onus firmly on eurozone governments to solve the bloc's debt crisis, dashing expectations it could take near-term action despite saying the currency area's economy was under increasing threat.

After the ECB left interest rates at 1 percent on Wednesday, President Mario Draghi played down prospects of a third round of long-term money creation and said it was wrong for monetary policy to fill a policy vacuum created by others.

The respite the ECB bought the eurozone at the beginning of the year by injecting more than 1 trillion euros ($1.24 trillion) into its banking system with twin 3-year loan operations (LTROs), has faded with borrowing costs for troubled countries such as Spain soaring once again.

"The issue now is whether these LTROs would actually be effective," Draghi told a news conference. "Some of these problems in the euro area have nothing to do with monetary policy ... and I don't think it would be right for monetary policy to fill other institutions' lack of action."

Draghi said the decision to leave rates unchanged was taken by "broad consensus," suggesting it was not unanimous. He said a few members, but not many, of the bank had wanted a rate cut.

Although flagging the increasing threat to the currency area's economy, new ECB growth forecasts for 2012 were unchanged — in a negative-0.5 to plus-0.3 percent range. The prediction for the following year was barely changed either.

"The economic outlook for the euro area is subject to increased downside risks relating in particular to a further increase in the tensions in several euro area financial markets and their potential spillover to the euro area real economy," Draghi said.

Increasingly alarmed by signs Spain's banking crisis is opening a new front in the debt crisis, EU leaders have started considering the form of economic union needed to make the bloc durable as well as more immediate measures to help Madrid.

But that end-game is still months or years away and in the meantime investors view the ECB as the institution with the firepower to keep the crisis in check.

"The Governing Council very much welcomes leaders at the last European Council meeting agreeing to step up their reflections on the long-term vision for economic and monetary union," Draghi said. "The Governing Council considers this a highly important step."

Markets were unsure how the ECB would react to a recent wave of weak economic data, knowing that the bank also wants to keep the pressure on eurozone leaders to tackle the crisis more effectively.

The euro was steady at $1.25 after the decision, Europe's benchmark stock market trimmed gains, while closely watched German bund future were also little changed.

DILEMMA

In the run up to the meeting, IMF chief Christine Lagarde, said the bank had room to cut rates. Spain and other hard hit parts of the eurozone would also like the ECB to revive its bond buying program to provide them with cover while they undertake planned repairs to their economies.

Eurozone unemployment stood at a record 11 percent in April, business confidence has slumped and surveys of manufacturing have hit three-year lows, adding to conviction that the bloc's economy is set to drop back into recession.

The bank's dilemma is that if does too much, pressure for government action falls. Yet if it does nothing, troubled sovereign debtors could find it harder and harder to finance themselves or maintain confidence in the banks that have bought much of their debt.

Draghi said the ECB would continue to supply eurozone banks with all the liquidity they ask for at least until January 15 next year. It had said in October it would give eurozone bank unlimited access to central bank funding at least until July 10.

Before the crisis, the ECB allotted a certain amount in its refinancing operations for which banks had to put in bids. Since the crisis began, the ECB has extended the maturity of such operations to as long as 3 years and has lifted funding limits.

Most ECB watchers had expected it would keep its powder dry until after June 17 Greek elections and a crunch summit of EU leaders at the end of June, which Draghi and his colleagues hope will dispel any doubts about Europe's commitment to the euro.

There are also growing signs that a decision on a bailout for Spain's debt-laden banks will have been taken by the end of the month.

© 2017 Thomson/Reuters. All rights reserved.

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