Draghi: We may downgrade forecasts

ECB president Mario Draghi’s press conference yesterday turned out to be a damp squib, as he said little that would move the markets either way.

The Italian signalled that the ECB could follow the lead set by the European Commission this week and downgrade the growth forecasts for the region.

In September the ECB announced the Outright Monetary Transactions (OMT) programme, which pledged unlimited support to beleaguered member states by buying up short-term bonds in return for committing to structural reforms.

There has been speculation Spain would apply for the programme. But Mr Draghi said several times during the conference that it was up to the Spanish government to contact the ECB. The Frankfurt-based institution did not have the mandate to advise Madrid to apply for the OMT.

But since the programme was announced two months ago it was already having positive benefits, he added. Irish and Portuguese bond yields had come down; money was flowing into European banks from the rest of the world; Italy and Spain were nearly fully funded; and both countries had increased their exposure to international investors.

“Draghi’s countless repetitions of the importance of the OMT program indicates that the ECB currently does not consider rate cuts as an effective tool to tackle the recession,” said Carsten Brezski, a Brussels-based economist with ING bank.

“The OMT remains the crown jewel in the ECB’s anti-crisis toolbox. However, as Draghi rightly said, with the OMT, the ECB has put in place a fully effective backstop for the eurozone, a backstop against the tail risk of a eurozone break-up.

“In my view, however, the OMT is not the magic bullet that can also restore growth. Even with structural reforms, austerity measures, and an active OMT, chances are high that the ECB will need to come up with additional measures to support the eurozone economy. A rate cut, even if it will not come next month, could be part of the measures.”

However, Mr Draghi said that monetary policy transmission was broken in the region and that nationalism was re-emerging across the banking sector. The only way these problems could be overcome is if every country accelerated fiscal consolidation and structural reforms in an effort to regain competitiveness.