European Central Bank Governing Council member George Provopoulos said a “normalization” on financial markets suggests the ECB might never need to activate its Outright Monetary Transactions bond-buying plan.
“Given that in the last few months we have had a kind of stabilization, normalization, maybe it will never be used,” Provopoulos said in an interview in Athens yesterday. “OMT has helped enormously. It is a good thing that we have decided to go ahead with that, just in case it would be needed.”
Provopoulos’s comments reflect growing confidence among officials that a market lull inspired by the ECB’s unlimited-purchase backstop, announced last year, can endure. Despite political turmoil in Italy and a chaotic bailout in Cyprus this year, Italian 10-year bond yields fell to the lowest since October 2010 this week.
“I think the worst of the debt crisis is behind us,” said Provopoulos, who heads Greece’s central bank. “This does not mean that all weaknesses have been dealt with or that the road ahead will be without bumps. But I think the worst is over.”
Provopoulos declined to comment on current monetary policy because he is in the so-called “purdah period” of verbal discipline in the week before an ECB rate decision. Officials convene in Bratislava on May 2.
On Greece, Provopoulos said that more stable conditions are helping his country make “good progress” toward re-balancing its economy after six years of recession and two international bailouts.
“What is important is that at some point in the near future, certainly by mid-2014 and probably sooner, we will see the economy picking up,” he said. “We could expect some positive signs even earlier, as the government continues to implement reforms.”
The Bank of Greece predicts that the economy will contract by as much as 4.5 percent this year before achieving moderate growth in 2014. Provopoulos said that picture hasn’t been endangered by last month’s bailout of Cyprus, which saw the country’s parliament reject an initial European Union-backed plan before an amended version was tabled about a week later.
A precedent-setting tax on bank deposits still raised concerns of contagion in Greece through the banking system, Provopoulos said.
“In Greece, there was quite a lot of concern, given that there are close economic and financial links between the countries,” he said.
As a result, there may have been a net outflow of deposits from Greek banks in April, as investors worried similar steps could be applied there, Provopoulos added.
“But I’m expecting a resumption of the steady improvement that we have seen since June,” he said. “Given that there is an overall climate of improved psychology, with the government delivering, deposits will continue coming back.”
Since elections in June 2012 briefly raised the prospect of a party coming to power that might have pushed Greece out of the euro, confidence has returned, bringing deposit flows back to the domestic banking system, Provopoulos said.
“Since the June elections we had deposit inflows of some 20 billion, while the pace of credit contraction has been kept moderate, at 4 percent,” he said.
Debate over the appropriateness of so-called austerity, which policy makers across Europe have backed since the outbreak of the financial crisis, has been rekindled as economies from the U.K. to Spain struggle to grow. Provopoulos said Greece had no choice.
“Within Greece, the fast pace of fiscal consolidation is having painful costs, because it means higher unemployment, lower incomes, lower salaries, higher taxes,” he said. “But, given our deep initial fiscal imbalances, there was no other alternative.”
Greece’s austerity measures are part of a wider effort to put the euro area back on a sounder footing, as are the region’s decisions to set up a banking union with the ECB’s OMT plan as a safety net, Provopoulos said.
“How soon growth will return will depend entirely on how soon Europe, especially the peripheral countries, are able to re-balance their economies,” he said. “We have made good progress in that area.”