European Central Bank President Mario Draghi warned of the high price of leaving the Eurozone, telling the Financial Times member states would face the same structural problems outside the common currency, along with rampant inflation, from a weaker position.
Draghi also gave himself a pat on the back for the ECB’s extraordinary actions in supporting Europe’s financial system, but said the central bank will not engage in Federal Reserve-style quantitative easing and that governments are responsible for restoring market confidence, particularly through the implementation of the European Financial Stability Facility (EFSF).
Draghi, the former Bank of Italy Governor whose last name means “dragons” in Italian, took over at the ECB in November, and the weekend FT story marks one of his first major interviews since becoming the head of the bank.
Asked if austerity programs put countries in a “debtor’s prison” with a declining economy and rising borrowing costs, Draghi gave his opinion on the consequences of leaving the eurozone:
“
This wouldn’t help. Leaving the euro area, devaluing your currency, you create a big inflation, and at the end of that road, the country would have to undertake the same reforms that were due to begin with, but in a much weaker position.
Draghi was critical of the way the crisis had been handled, noting the problem was one of confidence. “The big change is that assets which were once considered absolutely safe are now viewed as potentially unsafe. We have to ask what can be done to restore confidence.”
Four steps are needed to solve the crisis, he said. First, national economies need to get their finances under control, showing markets they are serious about reining in their out-of-control spending.
Second, fiscal discipline has to be restored via enforcement mechanisms, as was proposed in the last EU Summit.
“However, we are in a situation where premia for these risks overshot,” Draghi explained. “When you have this high volatility – like we had after Lehman – you have an increase in the counterparty risk.
In the worst case, you can have accidents and even if you don’t have accidents, you have a much reduced economic activity because people become exceedingly risk averse.”
Thus, the third, and most important step, is to “have a firewall in place which is fully equipped and operational.”
In other words, Draghi is asking eurozone leaders in general, and Angela Merkel and Nicolas Sarkozy in particular, to get the EFSF funded and ready to go as soon as possible. Finally, the last step is to address the dual issue of fiscal discipline and lack of economic growth.
Draghi denied the ECB would engage in quantitative easing similar to the billions in Treasury purchases made by the Fed under Ben Bernanke. The ECB chief highlighted his institution’s swiftness in acting to avert an even deeper crisis, citing the most recent interest rate cuts and the provision of cheap liquidity to banks via three-year “long-term refinancing operations.”
Many, like Dennis Gartman, have said that providing cheap money to banks to allow them to buy sovereign and corporate debt is pretty much the same thing as buying the assets directly.
Draghi disagreed: “the objective is to ease the funding pressures that banks are experiencing. They will then decide what the best use of these funds is.”
About the ECB bond-purchasing program, which topped €200 billion ($260 billion) in purchases of peripheral debt, Draghi said “it is neither eternal nor infinite.” SMP, as the program is named, is “justified” given “seriously impaired” market channels that transmit interest rate decisions.
Remember, though, that there is an EU ban on ECB funding sovereign governments, Draghi said.
Draghi was very clear that he will do what he can to avoid making the ECB a buyer of last resort. He openly rejects QE, while he remains ready to engage in “unprecedented” policy maneuvers to support the EU. But markets remain under pressure.
In the U.S., major financials were deep in negative territory with Morgan Stanley, Citi, JPMorgan, and Goldman Sachs all down 2.8% or more.
Time, it seems, is running out. And even though Draghi seems keenly aware of the risks, he still has hopes politicians can save the day. That’s a risky bet, like going long the euro.
forbes.com
Draghi also gave himself a pat on the back for the ECB’s extraordinary actions in supporting Europe’s financial system, but said the central bank will not engage in Federal Reserve-style quantitative easing and that governments are responsible for restoring market confidence, particularly through the implementation of the European Financial Stability Facility (EFSF).
Draghi, the former Bank of Italy Governor whose last name means “dragons” in Italian, took over at the ECB in November, and the weekend FT story marks one of his first major interviews since becoming the head of the bank.
Asked if austerity programs put countries in a “debtor’s prison” with a declining economy and rising borrowing costs, Draghi gave his opinion on the consequences of leaving the eurozone:
“
This wouldn’t help. Leaving the euro area, devaluing your currency, you create a big inflation, and at the end of that road, the country would have to undertake the same reforms that were due to begin with, but in a much weaker position.
Draghi was critical of the way the crisis had been handled, noting the problem was one of confidence. “The big change is that assets which were once considered absolutely safe are now viewed as potentially unsafe. We have to ask what can be done to restore confidence.”
Four steps are needed to solve the crisis, he said. First, national economies need to get their finances under control, showing markets they are serious about reining in their out-of-control spending.
Second, fiscal discipline has to be restored via enforcement mechanisms, as was proposed in the last EU Summit.
“However, we are in a situation where premia for these risks overshot,” Draghi explained. “When you have this high volatility – like we had after Lehman – you have an increase in the counterparty risk.
In the worst case, you can have accidents and even if you don’t have accidents, you have a much reduced economic activity because people become exceedingly risk averse.”
Thus, the third, and most important step, is to “have a firewall in place which is fully equipped and operational.”
In other words, Draghi is asking eurozone leaders in general, and Angela Merkel and Nicolas Sarkozy in particular, to get the EFSF funded and ready to go as soon as possible. Finally, the last step is to address the dual issue of fiscal discipline and lack of economic growth.
Draghi denied the ECB would engage in quantitative easing similar to the billions in Treasury purchases made by the Fed under Ben Bernanke. The ECB chief highlighted his institution’s swiftness in acting to avert an even deeper crisis, citing the most recent interest rate cuts and the provision of cheap liquidity to banks via three-year “long-term refinancing operations.”
Many, like Dennis Gartman, have said that providing cheap money to banks to allow them to buy sovereign and corporate debt is pretty much the same thing as buying the assets directly.
Draghi disagreed: “the objective is to ease the funding pressures that banks are experiencing. They will then decide what the best use of these funds is.”
About the ECB bond-purchasing program, which topped €200 billion ($260 billion) in purchases of peripheral debt, Draghi said “it is neither eternal nor infinite.” SMP, as the program is named, is “justified” given “seriously impaired” market channels that transmit interest rate decisions.
Remember, though, that there is an EU ban on ECB funding sovereign governments, Draghi said.
Draghi was very clear that he will do what he can to avoid making the ECB a buyer of last resort. He openly rejects QE, while he remains ready to engage in “unprecedented” policy maneuvers to support the EU. But markets remain under pressure.
In the U.S., major financials were deep in negative territory with Morgan Stanley, Citi, JPMorgan, and Goldman Sachs all down 2.8% or more.
Time, it seems, is running out. And even though Draghi seems keenly aware of the risks, he still has hopes politicians can save the day. That’s a risky bet, like going long the euro.
forbes.com
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