Draghi Softens Outlook on Risks as ECB Refuses to Show Its Hand on Greece
European Central Bank President Mario Draghi signaled the economic outlook has improved, suggesting policy makers may be less inclined to add to stimulus as Greece reached agreement on austerity measures to secure a bailout.
“The economic outlook remains subject to high uncertainty and downside risks,” Draghi said at a press conference in Frankfurt today. Last month, he said the outlook was subject to “substantial” downside risks. The ECB left its benchmark interest rate at a record low of 1 percent, as predicted by 55 of 57 economists in a Bloomberg News survey, and Draghi said officials didn’t discuss a rate change.
“With the more optimistic outlook, a March rate cut is still possible but far from certain,” said Christian Schulz, senior economist at Berenberg Bank in London. “If the rebound in confidence indicators gains strength and more hard data confirms the trend, the ECB may leave rates unchanged.”
Draghi spoke as Greek political leaders reached agreement on measures required for a new rescue package to stave off default. That may pave the way for a deal to write off about half the face value of Greek bonds held by private investors, or about 100 billion euros ($133 billion). Both are key steps toward avoiding default and ending the debt crisis.
While Draghi didn’t rule out that the ECB may use its own Greek bond holdings to help alleviate the nation’s debt burden, he said he can’t comment until after euro-area finance ministers meet in Brussels tonight.
“I cannot say anything on how our holdings of Greek bonds will be treated,” Draghi said. Talk of the ECB sharing losses is “unfounded” and “it is not our intention to violate” the prohibition on monetary state financing.
The euro rose after Draghi spoke, trading at $1.3303 at 5:04 p.m. in Frankfurt, up 0.3 percent on the day. German bonds fell, pushing the yield on the country’s 10-year government security up 5 basis points to 2.036 percent.
The ECB has purchased 219 billion euros of debt-strapped nations’ bonds since May 2010. Between 36 billion euros and 55 billion euros are invested in Greek sovereign debt, according to estimates by Barclays Capital and UBS AG.
The ECB is considering selling those bonds to the region’s rescue fund, the European Financial Stability Facility, at the knock-down price it paid for them, forgoing any profit, two euro-area officials who declined to be identified said late last week. The EFSF could then pass that saving on to Greece or even take a loss on the bonds, helping to alleviate the nation’s debt load without compromising the ECB’s independence.
“If you make a loss on the sales, this is monetary financing,” Draghi said. “The EFSF is governments, so if the ECB gives money to governments that’s monetary financing. If the ECB distributes part of its profits to its member countries as part of its capital key, that’s not monetary financing.”
Draghi is saying “that the sale of ECB-owned Greek government bonds to the EFSF without a loss would not mean financing states with central bank money,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. “It has thus become more likely that the ECB in the end participates in a Greek debt restructuring.”
Draghi has been instrumental in easing the debt turmoil in his first 100 days in office, offering banks unlimited three- year loans and reversing the two rate hikes implemented by his predecessor, Jean-Claude Trichet.
Bond yields from Italy to Ireland have declined and latest economic data suggest the 17-nation euro region may avoid a prolonged recession. Business confidence in Germany, Europe’s largest economy, rose to a five-month high in January and factory orders gained 1.7 percent in December.
“Real gross domestic product growth in the fourth quarter of 2011 is likely to have been very weak,” Draghi said. “There are tentative signs of stabilization in economic activity at a low level. Looking ahead, we expect the euro-area economy to recover very gradually in the course of 2012.”
In December, the ECB forecast economic growth of 0.3 percent this year and 1.3 percent in 2013. It will publish new projections in March.
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