Wednesday 21 February 2018

Draghi says ECB must stay course on price stability

Central Bank chief presses governments to move on region's rescue fund

Jeff Black and Jana Randow

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, Mr Draghi said in a speech in Frankfurt yesterday. "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 Mr 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 is 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," Mr 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," he added.

Separately, ECB Executive Board member Jose Gonzalez-Paramo said in Madrid that it was not the central bank's role to act as a lender of last resort to governments.

The ECB bought Spanish and Italian debt yesterday, sending yields lower, said at least three sources who declined to be identified because the deals were private. The yield on Italy's 10-year bond fell to 6.7pc from above 7pc 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 €20bn on sovereign debt purchases.

The ECB has spent €187bn 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. US President Barack Obama has urged more action from his European counterparts.

French Finance Minister Francois Baroin said in Paris this week that "the best way to avoid contagion is to have a solid firewall" by using central bank support for Europe's €440bn 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. "Confidence in a currency tied to the rule of law cannot be gained on the basis of illegal actions," Commerzbank CEO Martin Blessing said in Frankfurt. "The treaties would have to be changed beforehand." (Bloomberg)

Irish Independent

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