Draghi Says Bond-Buying Pledge Helps Transmit Rates

European Central Bank President Mario Draghi said his pledge to buy government bonds is helping to ensure that interest-rate cuts reach the parts of the euro-area economy that need them the most.

“Our measures gave breathing space from markets driven by panic, which were forcing the economy into a position where inappropriately high interest rates would make default a self-fulfilling prophecy,” Draghi said in a speech in London. “Today we are seeing some encouraging signs of tangible improvements in financial conditions. Spreads in sovereign and corporate debt markets have narrowed considerably.”

Since Draghi pledged last year to buy unlimited amounts of government bonds in exchange for countries signing up to economic reforms, conditions in euro-area financial markets have improved. Even though his so-called Outright Monetary Transactions program has yet to be used, bond yields in distressed countries such as Greece and Spain have dropped from euro-era records and banks’ reliance on ECB funding has declined, indicating confidence is returning.

The ECB has “started observing convincing signs that fragmentation on the funding side for banks has decreased greatly,” Draghi said last night. “And although bank lending to businesses and households remains anaemic, we are now seeing some signs of slight improvement on the lending side as well.”

Challenging Conditions

The yield on Greek 10-year bonds fell below 10 percent on May 3 for the first time since October 2010. It traded at 8.83 percent at 8:28 a.m. in Frankfurt. The yield on Spanish 10-year securities rose 2 basis points to 4.31 percent. The euro was little changed at $1.2937.

The ECB cut its benchmark interest rate to a record low of 0.5 percent this month and Draghi indicated he’s ready to lower borrowing costs again if the economic outlook deteriorates. The Frankfurt-based institution will publish new forecasts in June.

“Economic conditions in the euro area remain challenging” and “labor-market conditions remain weak,” Draghi said. “To maintain and expand the productive capacity of our societies, national governments need to improve the structural functioning of their respective economies.”

The “painful” reforms already undertaken by debt-strapped countries “are starting to bear fruit,” he said. “We see this very clearly, for instance, in the impressive improvement in export performance in Ireland, Spain and Portugal and in the recent uptick in industrial production in the latter two countries.”

Europe’s monetary union is more stable than it was a year ago and markets are “fully confident that the euro is a strong and stable currency,” Draghi said.

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