ECB ‘looks clueless’ in tackling fragmentation

The eurogroup of finance ministers would have to decide whether the ESM is used to recapitalise the Irish banks, but the ECB backs any proposal that breaks the link between banks and sovereign debt, said its president Mario Draghi.

Speaking at the European Central Bank’s monthly meeting, Mr Draghi was responding to a question about the IMF’s latest review of the Irish economy in which it urged its troika partners to inject European Stability Mechanism funding into the Irish banking system.

The ECB left interest rates unchanged again this month. Mr Draghi declined to say whether a rate cut was on the cards over the summer months.

This is the first ECB meeting since the controversial bailout of the Cypriot banking system.

The bank’s president said the original attempts to impose a haircut on all depositors “was not a smart move”. However, the subsequent decision to bail-in depositors of over €100,000 would not be a template for future bank bailouts, he added.

Comments made by the chairman of the eurogroup, Dutch finance minister Jeroen Dijsselbloem, which had been interpreted to that effect “had been misunderstood”, said Mr Draghi.

He noted that fragmentation in bank lending across the eurozone remains one of the biggest challenges facing the region. Lending to SMEs, in particular, remains much more constrained in periphery countries than it does in the core. An interest rate cut will do little to fix this anomaly.

“However, judging from [the] press conference, the ECB looks rather clueless on how to tackle the problem,” says Carsten Brzeski, an economist with ING in Brussels.

Mr Draghi said the ECB is looking at a number of non-standard measures that could be deployed to boost bank lending, however, it has not yet opted for any policy.

“The fact that Draghi stressed the OMT [outright monetary transactions] — up to now a pure psychological measure — as the ECB’s most powerful monetary policy tool illustrates the ECB’s frustration to find further measures.

“It looks as if the ECB has also realised that there is no bazooka to tackle the economic fragmentation.”

“If the recovery fails to materialise, the ECB will have to choose one of the two options.

“But for the time being, the ECB just looks a bit clueless (and so are we),” said Mr Brzeski.