Draghi Says ECB Must Stay Course, Presses Governments to Act on Finances
European Central Bank President Mario Draghi pushed back against politicians and investors asking him to do more to end the sovereign debt crisis, expressing impatience with leaders’ failure to act.
The ECB would quickly lose credibility if it departed from its primary role of keeping prices stable, Draghi said in a speech in Frankfurt today. “Where is the implementation” of government pledges to bolster the region’s rescue fund, he asked. “We should not be waiting any longer.”
The comments suggest Draghi is unwilling to make large- scale bond purchases to extinguish a debt crisis that has spread from Greece to Ireland, Portugal, Italy and Spain, threatening to tear the 17-nation monetary union apart. While the ECB is intervening in debt markets in an attempt to lower soaring yields, it’s refusing to unleash the unlimited firepower that some governments are calling for.
“Losing credibility can happen quickly -- and history shows that regaining it has huge economic and social costs,” Draghi said. Keeping prices stable “is the major contribution we can make in support of sustainable growth, employment creation and financial stability. And we are making this contribution in full independence.”
Lender of Last Resort
Separately, ECB Executive Board member Jose Manuel Gonzalez-Paramo said in Madrid that it’s not the central bank’s role to act as a lender of last resort to governments.
The ECB bought Spanish and Italian debt today, sending yields lower, said at least three people with knowledge of the trades who declined to be identified because the deals are private. The yield on Italy’s 10-year bond fell to 6.7 percent from above 7 percent earlier this week, the level that triggered bailouts for Greece, Ireland and Portugal.
ECB policy makers attending the Frankfurt conference declined to comment on a report in Germany’s Frankfurter Allgemeine Zeitung that they have agreed to a weekly limit of 20 billion euros ($27 billion) on sovereign debt purchases.
The ECB has spent 187 billion euros on government bonds since its purchase program started in May last year. It drains the same amount of money from the banking system to ensure the extra liquidity created by the purchases doesn’t fuel inflation.
The debt crisis is forcing governments to implement austerity measures, pushing Europe toward recession and threatening to curb global growth. U.S. President Barack Obama has urged more action from his European counterparts.
French Finance Minister Francois Baroin said in a speech in Paris on Nov. 16 that “the best way to avoid contagion is to have a solid firewall” by using central bank support for Europe’s 440 billion-euro rescue fund, a proposal rejected by German Chancellor Angela Merkel.
German policy makers say using the ECB’s balance sheet, either by increasing its bond purchases or allowing the rescue fund to borrow from the central bank for that purpose, is akin to printing money to bail out governments. That measure, known as monetary financing, is prohibited by the ECB’s founding treaty because it could undermine the central bank’s independence and fuel inflation.
“Confidence in a currency tied to the rule of law cannot be gained on the basis of illegal actions,” Commerzbank AG Chief Executive Officer Martin Blessing said in Frankfurt today. “The treaties would have to be changed beforehand.”
‘Overstretching the Mandate’
Speaking at the same event, Bundesbank President Jens Weidmann, who also sits on the ECB’s Governing Council, said the economic costs of any form of monetary financing “outweigh its benefits so clearly that it will not help to stabilize the current situation in any sustainable way.”
“The lack of success in containing the crisis does not justify overstretching the mandate of the central bank and making it responsible for solving the crisis,” Weidmann said.
The ECB is already lending banks as much cash as they need and this month cut its benchmark rate by a quarter percentage point to 1.25 percent.
Gonzalez-Paramo said new economic projections will play an important role in what the bank decides to do with rates at its next policy meeting on Dec. 8.
Draghi said earlier this month that the ECB is likely to significantly revise down its growth forecasts and that the economy may enter a “mild recession.”
“In the euro area, downside risks to the economic outlook have increased, and the weaker degree of activity will moderate price, cost and wage pressures,” he reiterated today.
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