Draghi Says ECB Action Helped Prevent ‘Major Credit Crunch’
European Central Bank President Mario Draghi comments on fiscal consolidation, the central bank’s three-year loans, and bank capital.
He spoke at the World Economy Forum today in Davos, Switzerland.
On austerity and a fiscal union:
“Countries themselves have to undertake the necessary fiscal consolidation, fiscal consolidation is unavoidable. There will be a short term contraction; the question is how we mitigate this. Many of these countries don’t grow.
‘‘The fiscal compact -- this set or rules at treaty level are very important. It will subtract from the national sovereign the fiscal discretion. This is necessary for the countries of the euro zone to go back to trusting each other. This is important, although hesitant, the first step to a fiscal union.
‘‘The amount of progress is outstanding. The progress of countries in the euro area of fiscal retrenchment and structural reforms is amazing. There is more determination to do more things that will have to be delivered.’’
On banks:
‘‘Banks today have more capital, less debt, are somewhat more immune to the perverse incentives that had characterized the crisis, have put in place risk management practices which are seriously more effective than they were in place before and we see this result now in a sense. We can say that the last two years have been from a financial perspective anything but tranquil, anything but stable, and still the financial system proved to be resilient.’’
On the ECB’s action in December to lend banks an 489 billion euros ($641 billion) for three years:
‘‘If you take 0.5 trillion euros and then you take off the reimbursement of other short-term facilities by the banking system in December, you get a figure of roughly 220 billion euros which is exactly the amount of bank bonds that were to come due in this period of time. So we know for sure we have avoided a major, major credit crunch, a major funding crisis.
‘‘We looked at deposit-facility actually going up, meaning that this money comes back with the central bank. Let me say this couldn’t be otherwise.
‘‘The identity of the banks that borrow is different from the identity of the banks that deposit. So it means that the borrowers have actually used this money that in the end that goes in the hands of the banks that would depo’’sit this money because they don’t need to use it immediately.
Also, ‘‘we went bank by bank and we saw that their bidding behavior reflected their situation with respect to the bank bonds that were coming due.
‘‘The unsecured bond market seems to have reopened to some extent and there has been bond issuance in the past two or three weeks equal to the previous six months.
‘‘Do we know that actually this money is either going to finance the real economy? We don’t have evidence of this kind yet. We will have to wait. There is a lag. We will have to see.
‘‘You have parts of the euro area where credit is more or less normal, but you have other parts where credit is seriously contracting.’’
‘‘We have to see a reactivation of the interbank market. We have to see that banks trust each other to the point they go back to lending to each other and don’t have to go through the central bank in order to lend to each other. That is when we’ll say the system now is back into functioning.’’
On the financial crisis:
‘‘If we go back four years ago, we see the start of the financial crisis. The key root cause of the financial crisis were serious, serious flaws in regulation policies. That coincided with expansionary policy’’ and ‘‘a savings glut in Asia.’’
To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
Rate These Stories
Rate this Page