European Central Bank chief Mario Draghi warned of a subdued economic outlook as the bank held interest rates steady and declared itself to be at the limit of what it can do for Greece.
While noting a marked uplift in market sentiment since the ECB introduced its unlimited bond-buying scheme two months ago, Mr Draghi was downbeat about economic conditions going into next year.
“Certainly the outlook is being revised and there’s a picture of weaker economy,” Mr Draghi told reporters in Frankfurt. He said this was bound to influence the bank’s own projections, a remark which followed a European Commission warning two days ago that economic growth in the euro zone will grind to a virtual halt next year.
With the main ECB interest rate unchanged at a record low of 0.75 per cent, Mr Draghi declined to comment on rate expectations and said the ECB’s governors have not discussed monetary policy for 2013.
“Economic activity in the euro area is expected to remain weak although it continues to be supported by our monetary policy stance and financial market confidence has visibly improved on the back of our decisions,” he said.
Bond-buying programme
He attributed this easing in market tensions to the outright monetary transactions (OMT) bond-buying programme and indicated the time was not right for the ECB to exit its emergency initiatives.
He also noted that a limited resumption in bond issuance by the Government was one of the positive spin-offs from the adoption of the OMT decision.
“There has been a return of flows from the rest of the world, in particular US money-market funds,” he said.
“Another positive sign is that there has been some limited bond placement by euro-area institutions. There have been a few issuances by Ireland and Portugal. The share of foreign holdings of these bonds, by Spain and Italy, has gone up, which is something we haven’t seen for a while . . . All of this is a good sign.”
He again ruled out the notion of the ECB taking a loss on its holdings of Greek sovereign bonds, saying that would amount to illegal monetary financing of the country. Asked what the bank could do for Athens, he said: “The ECB is by and large done.”
His remarks followed the positive outcome in Athens of the first of two parliamentary votes on a drastic new austerity package which is a condition for the release of another €31 billion in bailout aid to Greece.
Greek debt burden
As the European authorities seek ways of cutting Greece’s debt burden, Mr Draghi said it was open to euro zone countries to pass on the profits made by national central banks to Athens. “It’s up to the governments to decide whether they want to use these profits for Greece.”
Mr Draghi declined to state whether Spain should seek an activation of OMT, saying it was for the country alone to decide to apply for aid. “It’s entirely up to the Spanish government. The ECB has produced the OMT, it’s a fully effective backstop mechanism. It has removed tail-risk. The conditions are also very, very clear.”
Spain’s borrowing costs have dropped sharply since Mr Draghi unveiled the OMT initiative, a reduction which has played into the hands of premier Mariano Rajoy as he campaigns to avoid a full-blown sovereign bailout.
