Draghi: ECB bank loans averted ‘major funding crisis’

The European Central Bank’s new round of loans to banks has averted a major credit crunch but credit remains seriously impaired in parts of the euro area, ECB president Mario Draghi said at the World Economic Forum in Davos yesterday.

He also said the risk premium on eurozone government bonds was likely to remain high for an extended period, despite budget deficit cuts, economic reforms and moves to strengthen Europe’s fiscal discipline and financial firewalls.

Draghi said it was not yet clear whether the nearly €500 billion the ECB pumped into the banking sector in a cheap three-year liquidity operation was filtering through to companies and consumers.

“So we know for sure that we have avoided a major, major credit crunch, a major funding crisis,” he said.

“Do we know that actually this money is going to finance the real economy? We don’t have evidence of this yet. We have to wait. There is a lag. In the meantime, you have parts of the euro area where credit is more or less normal. You have [other] areas where credit is seriously impaired.”

The Italian ECB chief, who has just marked his first 100 days in office, said last month’s flood of cheap money had also had some impact in easing tension on the government bond market, but it had not yet persuaded banks to lend to each other.

“There was some response on the sovereign [bond market] side, but we have to see yet one key thing: we have to see the reactivation of the interbank market. We have to see that banks trust each other to the point that they go back to lending to each other and don’t have to go through the central bank to lend to each other.”

He praised governments in the 17-nation eurozone for making progress towards stricter enforcement of budget discipline rules, foregoing part of their national sovereignty, and moving forward with structural economic reforms.

“The fiscal compact, this set of rules at treaty level are very important because [they] basically subtract from national sovereignty part of the fiscal policy discretion.

“This is necessary for the countries of the euro area to go back to trust each other. This treaty is important because it’s the first step — though timid, though hesitating — towards a fiscal union,” he said.

Draghi underlined that the central bank was as committed to preventing inflation from undershooting as it was to fighting excessive price rises, recalling its goal of annual inflation below but close to 2%. Economists expect the ECB will cut rates to 0.75% in the next couple of months and some believe they could go as low as 0.5% before the middle of the year.

Reuters