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ECB’s Draghi Sees Economic Weakness Continuing Into 2013

European Central Bank President Mario Draghi comments on inflation, economic expectations, next week’s European Union summit and a single banking supervisor for the euro-area.

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

On rate cuts:

“There was a wide discussion, but in the end, the prevailing consensus was to leave the rates unchanged.”

“I also highlighted the very accommodative monetary policy stance. If you think from July to today, some countries’ spreads, or some sovereign bond yields, went down by 200 to 250 basis points. That’s much more than anything you can achieve by a reduction in the short term policy rate.”

On Greece:

“A lot has been asked on the public sector. The debt buyback is part of this and it’s early to say how this is going.”

“What is most important of this latest agreement is the medium term commitment to possibly provide new money in case Greece were to have primary surplus, but somehow things were not going, -- not because of Greece’s lacking of compliance with the program. This is quite important, that’s the first time it’s been done.”

There has been “significant progress.”

“I acknowledge progress the government has done. That’s very important. Part of what’s happening is needed adjustment. Let’s not forget the imbalances from which the Greek economy was starting were very large.

On Spain and OMT:

‘‘We all said all the time we would not tell governments what to do. It’s up to them. They know what the conditions are. This is going to be a necessary, but not sufficient condition. The ECB will carry out its own independent assessment. This holds for Spain and any other country.”

“Its hard to say whether it’s a price worth paying.”

“The conditions under which the OMT is activated are very clear.”

“Don’t speak about negotiations or agreement about a certain interest rate.”

“The main aim of the OMT is to remove tail risk to overcome monetary or financial fragmentation of euro area that stem from redenomination risk.”

“We will do it in a size that would be adequate to achieve its objective.”

On Ireland:

“The new budget reaffirmation of successful commitment of Irish government in restoring sound economic conditions.”

On markets and OMT:

“After OMT the improvement on financial markets has been significant.”

“You have these conflicting signs. Some point downwards, some point upwards. We will continue monitoring the situation.”

On single supervisor for banks:

“The benefits of one single supervisor in euro area are not disputed.”

“I’m very confident we will reach an agreement. There are benefits of having one single supervisor.”

“I’m quite confident we will soon have an agreement.”

“One should aim at having this mechanism covering all euro area banks from a legal jurisdiction viewpoint.”

“You want to keep a level playing field.”

“In practice it’s quite obvious the ECB supervisor will not be able to supervise 6,000 banks. But in practice I don’t think there’s much difference between this and what has been suggested by others.”

On inflation:

“The underling pace of monetary expansion remains subdued.”

“Over the policy relevant horizon, inflation should remain in line with price stability.”

“Inflation rates are expected to decline further to below 2 percent next year. Underlying price pressures should remain moderate.”

“In the governing council assessment, risks to the outlook for price developments are seen broadly balanced.”

“The outlook for the medium term price stability hasn’t changed substantially. We will continue to look at the situation, but to some extent, we have already done much.”

On euro-area economy:

“In 2013, economic activity should gradually recover as our accommodative policy and significantly improve financial markets work their way through the economy.”

Data “continue to signal further weakness in the final quarter of thus year.”

“Weak activity is expected to continue into next year.”

“A gradual recovery should start later in 2013.”

“Financial market confidence has improved further.”

“A strengthening of foreign demand should also support export growth.”

“The governing council continues to see downside risk for the euro area that relates to sovereign debt risk.”

“Geopolitical issues and fiscal policy issues in the U.S. are possibly dampening sentiment for longer than currently assumed.”

“The economic outlook is weak. At same time we haven’t seen any substantive change in our medium term assessment of price stability.”

“Monetary policy remains accommodative.”

On government bonds:

“I haven’t said that higher credit costs are unjustified, but there is a extent, a range, beyond which, like redomination risks, which make these differences unacceptable.”

On euro-area summit next week:

“This is going to be an important council.”

“I am sure the determination of the June summit will be confirmed in the oncoming summit.”

On euro bonds:

“We have to understand that originally there was a breach of trust in euro area between countries that were always, or most of time, complying fiscal soundness and countries that didn’t do so.”

“The issue in last two years was to rebuild trust.”

“It’s pointless to begin from a euro bond. It’s pointless to begin from a policy where I issue and you spend.”

“That will become realistic when the trust is reestablished.”

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