ECB President Draghi Downplays Central Bank's Role in Crisis Management
December 19, 2011
In his first interview since becoming ECB president on November 1, Mario Draghi told the FT Monday that there were costs associated with a Eurozone break and that the ECB’s role in combating the crisis was limited.
Mr. Draghi appeared willing to discuss the possibility of a Eurozone breakup, something that his predecessor, Jean-Claude Trichet, had called “absurd.”
Draghi said countries that may decide to leave the Eurozone would likely face even greater economic pain than they are experiencing now. The ECB President said that any currency devaluation that would result from countries leaving the bloc would create “a big inflation.”
In terms of the impact such a move would have on the remaining members of the European Union, Draghi points out that the EU law would have been broken by such an event and “you never know how it ends really,” he told the FT.
Perhaps the biggest news out of the interview was Draghi’s continued dampening of market expectations relating to the central bank's role in stemming the sovereign debt crisis. Recall that the global markets interpreted the ECB President’s comments prior to the latest EU summit as a “carrot” enticing EU leaders to form a tighter fiscal union rules and consequences for budget cheaters. Markets assumed that Draghi had offered a quid pro quo for a fiscal compact.
However, while Draghi highlighted the importance of the unconventional measures introduced recently by the ECB (including two new LTRO’s with offer unlimited three-year funding for banks, which are being called a "back-door bazooka" by some), the ECB head emphasized that it is up to the region's politicians to restore market confidence by ensuring fiscal discipline and getting the EFSF operational.
Draghi also expressed hope that the EFSF’s resources could be enlarged after a review in March. “I think that if one can show its usefulness in its present size, the argument for its enlargement would be much stronger,” Draghi said in the interview.
In terms of open market bond buying, something most Europeans view as vital in terms of fighting contagion, Draghi said that the ECB’s modest bond purchasing program would remain justified as long as market volatility continued to impair the transmission of monetary policy.
However, Draghi once again stressed that the ECB is legally prohibited from funding government operations and the providing bailout loans is not permitted. However, Draghi does appear opposed to the ECB setting limits on bond purchases.
The article also said he appeared to rule out US or UK style quantitative easing. Draghi said, “The important thing is to restore the trust of the people – citizens as well as investors – in our continent. We won’t achieve that by destroying the credibility of the ECB.”
Seperately, Reuters is reporting that ECB governing council member Christian Noyer said the central bank will continut to intervene to stem the liquidity crises that impact European banks' stability and to maintain price stability. However, he added that large-scale purchases of sovereign debt (aka Quantitative Easing) remain "well beyond" the ECB's role .
According to StreetAccount, Noyer also pointed out that large scale asset purchases are not without risks, as while they may help to eliminate upward pressure on interest rates in the short term, they also impact price and financial stability in the medium term.
Recall that one of the "unintended consequences" of the Fed's QEII program was the spike in commodity prices.
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