ECB’s Draghi Says There Is No Reason to Think About Exit Now

European Central Bank President Mario Draghi comments on inflation, the economic outlook for the euro-area and the region’s sovereign debt crisis.

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 rates:

“The decision was unanimous.”

“If you look at the overall landscape, taking a medium term perspective, you would see a significant improvement in financial market conditions and a broad stabilization of market indicators.”

“Bond yields and country CDS are much lower. Stock markets have increased. Volatility is at a historical minimum. The deposit in peripheral banks have gone up, Target 2 balances have gone down. All in all we have signs that fragmentation is being gradually repaired. But all of this has not found its way to the real economy yet, so the real economy continues to be weak.”

“The real economy continues to be what was diagnosed in our projections a month ago, so there wasn’t any reason to change the outlook for price stability. That’s why our discussion has been unanimous.”

On exit plan:

“We are not thinking about an exit now, but we see that the system, the economy, will exit when its ready. We still see signs of significant fragmentation in the euro area.”

“You also need to see some general greater strength in the economy. The continuation of the structural reforms process, the regaining of competitiveness, the actions in the product markets, all these are factors that grant a long term improvement, not just in the financial markets.”

On lending/LTRO:

“Banks don’t lend for three reasons, one is lack of funding, the other is risk aversion or credit risk. The improvement in repairing fragmentation will find its way to the economy and we will see better credit conditions through the course of this year. We are pleased not so much that yields have gone down but that tail risks have been removed.”

“On the LTRO, we believe that funding conditions right now are satisfactory. I don’t think that’s where the problem is We believe that funding conditions right now are satisfactory. Contrary to the beginning of last year.”

“The LTRO have avoided disorderly delivering which could have had even worse consequences on the credit flows and further disruption to economic activity.”

“Each central bank has its own institutional setup, its own statutory objectives and its own mandate. Each central bank tries to steer private sector expectations.”

“We have estimates of course but the range of these estimates is so wide that I don’t want to discuss them now. We will know more at the end of this month when the banks will start repaying their first LTRO. They can repay it weekly. We will communicate the amounts and the number of counterparties. You will not know from us the names of the banks. On Feb. 27 they will start repaying if they do wish so the second LTRO. They can repay on a weekly basis and everything will be communicated on a weekly basis as well.”


“The OMT foresees conditionality, conditionality with ESM and IMF presence. Means that countries have to act. It does require an independent assessment by the governing council.”

On banking regulation and supervision:

“I think a lot of repairing has been taking place since Lehman times. Let me also add another positive side: national supervisors have become much more alert, active intrusive, than they were before the financial crisis. Also the flow of new regulation that has come out and been put into place after the financial crisis. The liquidity rules by themselves don’t have a direct relationship to the balance sheet. They deal more with the funding of banks.”

“We welcome the agreement of Basel on liquidity rules. They’re not being postponed. It’s just that there was no agreement.”

“When you change deeply the rules for the capital you need to give times to the banks to adjust. Not just to the banks but also to some of the policy makers.”

On unemployment:

“Our mandate is not full employment like in the dual mandate of the Fed. Our mandate is to maintain price stability.”

“There are certainly some elements of the unemployment being structurally high.”

“What’s the reason for such high youth unemployment? You have often dual labor markets with very little protection, and the old, the others, with protection. So you have unemployment that gets concentrated in the younger part of the population.”

On exchange rates:

“I never comment about exchange rates but the exchange rate is certainly a very important element as far as growth and price stability is concerned and we certainly use it as part of our growth and price stability assessment.”

“The real and effective exchange rates of the euro are at their long term average.”

On comments from ECB board and governing council members:

“My responsibility is to convey the decisions of the gov council, not comment on individual voices. The principal of a single voice is essential and markets have understood this, it seems at least to me.”

On inflation:

“Risks to inflation over the medium term are seen as broadly balanced.”

“Underlying price pressures should remain constrained.”

“When you look at output gaps, you see the significant levels of output gaps would justify lower levels of inflation than we actually have. Monetary policy cannot do much about that.”

On euro-area economy:

“The economic weakness in the euro area is expected to extend into 2013.”

“It is essential for governments to reduce fiscal imbalances and proceed with financial restructuring.”

“Economic Weakness is expected to expand further into this year.”

“Risks around the economic outlook in the euro area remain on the downside.”

“Geopolitical issues and imbalances in major industrialized countries have the potential to” hurt economic growth “for longer than currently predicted.”

“Subdued loan dynamics reflect the current stage of the business cycle, heightened credit risk.”

“To sum up, the economic analysis indicates that price developments should remain in line with price stability in the medium term.”

“Further structural reforms should be rapidly implemented to make the euro a more flexible and dynamic economy.”

“Product market reforms to increase competition are essential.”

“We are now back in a normal situation from a financial viewpoint but we are not at all seeing an early and strong recovery.”

“We’re absorbing more a normalization of certain conditions. There are signs here and there that might suggest there is exuberance in specific localized parts of the financial system. But so far these are fairly limited and contained examples.”

“The risks stem essentially from lack of action by the governments on the fiscal side. What I mean by that: Not only fiscal consolidation is essential but also implement it in a proper way.”

“Eventually that’s the only thing that matters for imbalances in the euro area. It’s to create a situation where you don’t have a permanent creditor and lots of permanent debtors. That’s where action is needed and will continue to be needed in the foreseeable future. You’ve seen the return of overvaluations of certain sectors of private equity deals, in buy outs and so on. That’s what I was referring to.”

“We have to acknowledge that significant progress has taken place in all countries in the euro area. You look at fiscal side, you look at current account, you look at competitiveness, unit labor costs, you look at exports, you look at basically all aspects of the economic activity have been affected by reforms of different kinds, whether fiscal or structural. The point now is not to be complacent about what’s taken place and relax but rather keep on , persevere. Because as we all see we start seeing the benefits and the benefits don’t just come from the OMT, from ECB action, they come from substantial progress that has been undertaken on the national level first and foremost. But also let’s not forget the significant progress that the year 2012 has brought at the euro area governance level. We made significant steps towards greater integration. So the beneficial effects we see today are really the composite outcome of all these factors. We spoke a lot about contagion when thinks go poorly but I believe there is a positive contagion when things go well. And I think that’s also what is in play now. There is a positive contagion.”

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