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ECB Chief Warns: Leave Eurozone and You'll Be Sorry

Monday, 19 Dec 2011 11:37 AM

Monetary policy such as quantitative easing won't help Europe's economic problems, and should a country decide to default and abandon the euro, it would suffer a fate worse than toughing it out in the currency zone, says European Central Bank (ECB) President Mario Draghi.

Markets have made repeated calls to Draghi to roll out quantitative easing, where the ECB buys government debt held by banks, a move that would lower borrowing costs and ease a credit crunch in Europe.

Draghi has remained firm that politicians must take the lead and rely on emergency assistance funds they have made available to themselves, and must also remain committed to austerity measures even if such policies are politically unpopular.
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Furthermore, quantitative easing pressures inflation rates upward, which would go against the central bank's mandate to maintain price stability.

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Mario Draghi
(Getty Images photo)
"The important thing is to restore the trust of the people — citizens as well as investors — in our continent. We won't achieve that by destroying the credibility of the ECB," Draghi tells the Financial Times.

The ECB has taken measures to help banks in troubled eurozone nations, including helping them refinance their debts via offering more access to short-term ECB loans, but monetary policy officials still won't help out governments directly via easing.

Draghi also stresses that those who leave the euro will be worse off than they are now.

"Leaving the euro area, devaluing your currency, you create a big inflation, and at the end of that road, the country would have to undertake the same reforms that were due to begin with, but in a much weaker position," Draghi says.

"When one starts with this you never know how it ends really."

European banks will need to refinance debts in the first quarter of 2012, but due to tight credit stemming for the crisis, funding in traditional lending markets remains tight, and the European Central Bank support is crucial.

According to Reuters data, 725 billion euros ($944.27 billion) of bank debt matures in 2012, 100 billion euros more than in 2011.

Still, bankers say, ECB lifelines won't solve Europe's underlying problems of easing massive debt burdens at countrywide levels.

"It's (the ECB funding) helpful in cutting off the risk of a bank failure and cutting off the risk of the markets staying shut, but it's not going to change the deleveraging dynamics," a senior banker tells Reuters.

Furthermore, banks are now required to set aside more capital to cushion themselves should the crisis get worse, which may offset some of the benefits that come with ECB support.

"It won't be Armageddon in 2012, but we'll be staying close to the cliff edge," a debt market banker tells Reuters.

While the world might not bracing for Armageddon, it is bracing for more uncertainty and volatility, and investors are hoarding up on cash and stocks in advance.

A Reuters survey of 56 investment houses in the United States, Europe, Britain and Japan showed a typical balanced portfolio held 6.6 percent of its assets in cash, its highest since at least December 2010.

Exposure to stocks rose to 51.3 percent, the highest since July, from 50.6 percent, while bonds fell to 34.3 percent from 35.3 percent, the lowest since March.

"Despite the more lackluster prospects for economic growth next year, we are positive on the longer-term prospects for equities, reflecting low valuations and the relatively strong financial positions of many companies," says Alec Letchfield, Chief Investment Officer, Wealth at HSBC Asset Management, according to Reuters.

"However, further volatility is likely and downside risks remain in the event of another escalation of the euro zone crisis."

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Monetary policy such as quantitative easing won't help Europe's economic problems, and should a country decide to default and abandon the euro, it would suffer a fate worse than toughing it out in the currency zone, says European Central Bank (ECB) President Mario...
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