European Central Bank President Mario Draghi said it’s not yet clear whether the ECB’s record injection of cash into the banking system is finding its way to households and businesses.
“Do we know that actually this money is going to finance the real economy? We don’t have evidence of this kind yet,” Draghi told an audience at the World Economic Forum today in Davos, Switzerland. “There is a lag. We will have to see.”
The ECB lent euro-area banks a record 489 billion euros ($640 billion) for three years in December to ward off a funding squeeze caused by a worsening in the two-year-old sovereign debt crisis. Since then, bond yields across the region have dropped and the unsecured bond market has shown signs of reopening, prompting Draghi to say on Jan. 19 that 2012 will be a “much better” year for Europe.
“We know for sure we have avoided a major, major credit crunch, a major funding crisis,” he said today. “You have parts of the euro area where credit is more or less normal, but you have other parts where credit is seriously contracting.”
Loans to households and companies contracted 0.7 percent in December from November, the most since records began in 1991, an ECB report showed today. Loans grew 1 percent from a year earlier, the lowest rate since July 2010 and down from the 1.7 percent annual gain in November.
The ECB, which has cut interest rates to a record low and widened the pool of collateral banks can use to obtain cheap cash, will offer a second batch of three-year loans on Feb. 28.
Draghi said banks appear to be using the funds to roll over maturing bonds.
“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,” he said.
The widening in bond yield spreads has been a “potent engine” for government reforms in the 17-nation currency bloc, and “outstanding” progress has been made on fiscal retrenchment and structural changes.
“There is more determination to do more things that will have to be delivered,” Draghi said.