European Central Bank President Mario Draghi said policy makers will keep focusing their crisis support on solvent euro area banks as he reiterated it’s not the ECB’s job to fix the cause of the region’s turmoil.
“The ECB will continue lending to solvent banks and will keep the liquidity lines active and alive with solvent banks,” Draghi told a European Union Parliament committee in Brussels today.
World stock markets have lost about $4 trillion this month as the turmoil in Europe reignited after inconclusive Greek elections and the threat of Spain’s finances being overwhelmed by its banking crisis. The ECB has shouldered the main burden of fighting the turmoil by flooding the banking system with over 1 trillion euros ($1.24 trillion), cutting its benchmark rate to a record low and buying government bonds.
When pressed on whether the ECB can step up action to tame financial turmoil and help cap widening bond spreads, Draghi said that “it’s not our duty, it’s not in our mandate” to “fill the vacuum left by the lack of action by national governments on the fiscal front,” on “the structural front, and on the governance front.”
Draghi signaled the ECB is in no rush to introduce a third three-year loan program as the turmoil hasn’t arrived at “the same levels reached in November 2011,” when such aid was first mooted. While the ECB’s lending can help improve bank liquidity, it cannot address risk aversion and capital shortages in the banking sector, he said.
Apart from funding “there are two other issues that are now hampering credit flow, one is risk aversion” and “the second is lack of capital,” Draghi said. “We cannot do much about the two other reasons about the slowing in credit.”
Draghi hinted that he is in favor of using the permanent bailout fund, the European Stability Mechanism, to be used to inject capital into banks.
“People are actually working on finding ways that the ESM could be used to recapitalize banks,” he said. “ The issue is not so much the use of ESM money to recapitalize banks but whether this could be done directly without having to go to governments.”
Still, with countries including Germany and Finland insisting they must be consulted before such funds are deployed, Draghi said there is a risk that “we have a big pot of money but nobody can touch it.”
He said one of the lessons drawn from the Bankia (BKIA) group’s need for a 19 billion euros capital injection is that “further centralization of banking supervision is needed,” as national governments and supervisors tend “to first underestimate the importance of the problem, then come out with a first assessment, then a second, then a third, then a fourth” and “all countries have done the same thing.”
This is “the worst possible way of doing things” as even though in the end they do the “right thing, but at the highest possible cost and price,” he said. He also urged governments to “err on the high side” when recapitalizing banks.
Spain needs to bail out lenders still reeling from the collapse of the real-estate boom while its own access to funding increasingly depends on domestic banks being kept afloat by the ECB’s refinancing operations. Rising borrowing costs are putting pressure on Rajoy’s five month-old government to join Greece, Portugal and Ireland in seeking external aid.
The yield on Spain’s 10-year government bond climbed 21 basis point to 6.63 percent yesterday, close to the euro-era record of 6.78 percent hit on Nov. 17. By contrast, the yield on Germany’s two-year bond fell to zero as investors forgo a return in exchange for safety amid Europe’s escalating crisis.
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