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Draghi Says OMT Has Helped Relieve Tensions Over Past Weeks

European Central Bank President Mario Draghi comments on monetary policy, the ECB’s new bond-purchase program and the region’s sovereign debt crisis.

He made the remarks at a press conference in Ljubljana, Slovenia, today after policy makers kept interest rates unchanged at a record low of 0.75 percent.

On ECB bond buying:

“OMT will enable us to provide under appropriate conditions a fully effective backstop.”

“We are strictly within our mandate to maintain price stability over the medium term. We would end OMTs when their objectives have been achieved or there has been a failure to keep to the program.”

“We view conditionality as an essential part of the activation of the OMT.”

“Conditionality will have several roles, it will reduce the moral hazard by governments.”

“The second role protects the independence of the ECB. With conditionality the independence of the ECB is protected. Without conditionality you would have fiscal dominance.”

“This is a way to have in effect a credit enhancement on the bonds of the country that is under conditionality.”

“There is a tendency to identify conditionality with harsh conditions. Conditionality doesn’t necessarily have to be punitive.”

“We would actively seek the IMF involvement in the process.”

“Today we are ready with our OMT.”

“We are ready and we have a fully effective backstop mechanism in place. It is in the hands of governments, we have said this many, many times, the ECB cannot replace the action of governments.”

“The OMT would not apply to country that is under a full adjustment program until full market access would be obtained.”

“The OMT is not a replacement for primary market access on that front.”

“The OMT is not meant to induce strategic response in issuing short terms by the issuer. We will certainly monitor the strategic response of the issuers.”

“All these countries that may need an OMT have all after many years of difficulties, reasonable maturities, of their stock of public debt.”

“It is very unlikely they will change this duration.”

“There are also serious cons if you change the maturities. The ECB will closely monitor this.”

“The OMT would create an environment that was conductive to reforms, because it could remove tail risks.”

On effects of OMT on capital markets:

“OMT has helped relieve tensions over the past few weeks.”

“There was a substantial significant improvement across financial markets and then there was a correction.”

“If we take a snapshot compared to the beginning of August we see spreads below where they were in July.”

“There has been sizable issuance by corporations and banks and Target 2 imbalances have somehow stabilized.”

“In Spain recourse to central bank deposits has gone down in the last month. So, not bad.”

On monetary policy:

“Non standard monetary policies are being designed and implemented when the standard ones aren’t fully effective.”

“We have to see if we can repair monetary policy transmission channels we don’t speculate on future interest rate changes.”

“There was no discussion, so it was a unanimous decisions on interest rates.”

“If the tradition of the Bundesbank was to ensure price stability the ECB is fully in sync with that position.”

“The level of fragmentation becomes unacceptable when the singleness of monetary policy is put into question.”

On euro-area banks:

“To a large extent, subdued loan growth reflects a weak outlook for GDP, heightened risk aversion and the ongoing adjustment in the balance sheets of households and enterprises.”

“A number of euro countries, the segmentation of financial markets and capital constraint for banks restrict credit supply.”

“It is thus essential that the resilience of banks continues to be strengthened where needed.”

“The ECB has started preparatory work.”

“The capitalization gap that was pretty wide until two years ago has been significantly reduced by the European banks.”

On banking supervision

“ECB welcomes single supervisory mechanism.”

“The governing council considers an single supervisory mechanism to be one of the financial pillars.”

“We have an organization that ensures de facto separation of monetary policy and banking supervision.”

“This can be done fully delegating to the supervisory board all the tasks.”

On euro-area countries’ economic efforts:

“Euro area countries are progressing with consolidation.” “It is crucial that efforts are maintained.”

“A rapid implementation of the fiscal compact will also play a major role in strengthening confidence.”

“In the countries most strongly affected by the crisis, noticeable progress is being made in the correction of unit labor costs and competitiveness.”

“We shouldn’t forget how countries got into bad equilibrium in the first place. Bad policies or no policies at all while all the other countries around them were changing.”

On Spain:

“In Spain that is one area where significant progress has been made. There are also significant challenges that remain.”

“That’s up to the Spanish government and the other euro area governments to decide.”

“Spain has completed almost 90 percent of the funding program of the sovereign.”

On Portugal:

“On Portugal that’s an example of the significant progress that I’ve hinted at before -- very significant progress has taken place.”

On inflation:

“This is higher than expected and mainly reflects increases in indirect taxes and in energy prices.”

“Owing to high energy prices and increases in indirect taxes in some euro area countries, inflation rates are expected to remain above 2% throughout 2012, then to to fall below that level again in the course of next year and to remain in line with price stability over the policy-relevant horizon.”

“The underlying pace of monetary expansion remains subdued.”

“In an environment of modest growth in the euro area and well anchored inflation expectations, price pressures should remain moderate.”

On the euro-area economy:

“Economic growth is expected to remain weak.”

“High uncertainty weighing on sentiment.”

“It is essential that governments continue to implement the necessary steps.”

“Economic indicators point to continued weak economic activity in the remainder of 2012, in an environment of heightened uncertainty.”

“We expect the euro area economy to remain weak in the near term and to recover only very gradually thereafter.”

“The growth momentum is expected to remain dampened by the necessary process of balance sheet adjustment in the financial and non-financial sectors, the existence of high unemployment and an uneven global recovery.”

“The risks surrounding the economic outlook continue to be on the downside.”

“We will continue to monitor closely further developments in costs, wages and prices.”

“Risks to the outlook for price developments continue to be broadly balanced over the medium term.”

“Upside risks pertain to further increases in indirect taxes owing to the need for fiscal consolidation. If not contained by effective action by all policy makers in the euro area, such intensification has the potential to affect the balance of risks on the downside.”

On youth unemployment:

“We completely share the concerns of the situation, several times members of the governing council have raised the issue with youth unemployment.”

“It is an incredible waste of resources.”

“It has to be addressed, it can be addressed by properly reforming the labor markets, by addressing the dual nature of the labor market.”

To contact the reporters on this story: Gabi Thesing in London at gthesing@bloomberg.net; Jeff Black in Frankfurt at jblack25@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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