Following is a transcript of European Central Bank President Mario Draghi’s comments from his monthly news conference in Frankfurt today:
MARIO DRAGHI, PRESIDENT, EUROPEAN CENTRAL BANK: OK. Ladies and gentlemen, the vice president and I are very pleased to welcome you to our press conference. We’ll now report on the outcome of today’s meeting of the Governing Council.
Based on our regular economic and monetary analysis, we decided to keep the key ECB interest rates unchanged. HICP inflation rates have declined further, as anticipated, and fell below 2 percent in February. Over the relevant policy horizon, inflationary pressures should remain contained.
The underlying pace of monetary expansion continues to be subdued. Inflation expectations for the euro area remain firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2 percent over the medium term. Overall, this will allow our monetary policy stance to remain accommodative.
Available data continued to signal that economic weakness in the euro area has extended into the beginning of the year, while broadly confirming signs of stabilization in a number of indicators, albeit at low levels. At the same time, necessary balance sheet adjustments in the public and private sectors will continue to weigh on economic activity.
Later in 2013, economic activity should gradually recover, supported by a strengthening of global demand and our accommodative monetary policy stance. In order to support confidence, it is essential for governments to continue implementing structural reforms, to build further on the progress made in fiscal consolidation, and to proceed with financial sector restructuring.
With regard to the liquidity situation of banks, counterparties have so far repaid 224.8 billion of the 1,018.7 billion obtained in the two three-year long-term refinancing operations, LTROs, settled in December 2011 and March 2012. In net terms, this implies that, of the increase in the outstanding volume of bank refinancing through the ECB’s monetary policy operations of around 500 billion between mid-December 2011 and early March 2012, about 200 billion have now been repaid.
These repayments reflect improvements in financial market confidence over the last few months and receding financial market fragmentation. We are closely monitoring conditions in the money market and their potential impact on the stance of monetary policy and the functioning of our transmission of our monetary policy to the economy. Our monetary policy stance will remain accommodative with the full allotment mode of liquidity provision.
Let me now explain our assessment in greater detail, starting with the economic analysis. The GDP outcome for the fourth quarter of 2012 was weak, with Eurostat’s second estimate indicating a contraction of 0.6 percent quarter on quarter. The decline was largely due to a fall in domestic demand, but also reflected weak exports.
As regards 2013, recent data and indicators suggest that economic activity should start stabilizing in the first part of the year. A gradual recovery should commence in the second part, with export growth benefiting from a strengthening of global demand and domestic demand being supported by our accommodative monetary policy stance.
Furthermore, the improvements in financial markets since July last year and the continued implementation of structural reforms should work their way through the economy. At the same time, necessary balance sheet adjustments in the public and private sectors -- and the associated tight credit conditions -- will continue to weigh on economic activity.
This assessment is also reflected in the March 2013 ECB staff projections for the euro area, which foresee average annual real GDP growth in a range between minus 0.9 percent and minus 0.1 percent in 2013 and between 0.0 percent and 2.0 percent in 2014.
Compared with the December 2012 Eurosystem staff macroeconomic projections, the ranges have been revised slightly downwards. The revision for 2013 mainly reflects a more negative carryover effect from the outcome for real GDP in the fourth quarter of 2012, while the projected path of the recovery has remained broadly unchanged.
The Governing Council continues to see downside risks surrounding the economic outlook for the euro area. The risks relate to the possibility of weaker than expected domestic demand and exports and to slow or insufficient implementation of structural reforms in the euro area. These factors have the potential to dampen the improvement in confidence and thereby delay the recovery.
According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.8 percent in February 2013, down from 2.0 percent in January. The ongoing decline in annual inflation rates mainly reflects the energy and food components of the price index.
Looking ahead, while the monthly pattern of inflation -- of headline inflation rates may be somewhat volatile, underlying price pressures should remain contained, given the environment of weak economic activity in the euro area. Inflation expectations are well-anchored and in line with price stability over the medium term.
The March 2013 ECB staff macroeconomic projections for the euro area foresee annual HICP inflation in a range between 1.2 percent and 2.0 percent in 2013 and between 0.6 percent and 2.0 percent in 2014. In comparison with the December 2012 Eurosystem staff macroeconomic projections, the ranges are broadly unchanged.
In the Governing Council’s assessment, risks to the outlook for price developments continue to be seen as broadly balanced over the medium term, with upside risks relating to stronger than expected increases in administered prices and indirect taxes, as well as higher oil prices, and downside risks stemming from weaker economic activity.
Turning to the monetary analysis, monetary figures for January 2013 support our assessment that the underlying pace of monetary expansion continues to be subdued. The annual growth of M3 remained broadly unchanged at 3.5 percent in January, after 3.4 percent in December 2012. The annual rate of growth of the narrow monetary aggregate, M1, increased to 6.7 percent from 6.3 percent in December 2012. The deposit base of MFIs in a number of stressed countries strengthened further in January.
The annual growth rate of loans to non-financial corporations stood at minus 1.5 percent in January, after minus 1.3 percent in December 2012. The annual growth in MFI loans to households moderated slightly to 0.5 percent, from 0.7 percent in December.
To a large extent, subdued loan dynamics reflect the current stage of the business cycle, heightened credit risk, and the ongoing adjustment of financial and non-financial sector balance sheets. At the same time, available information on the access to financing of corporates indicates tight credit conditions for small- and medium-sized enterprises.
Excuse me. In order to ensure adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential to continue reducing fragmentation of euro area credit markets and strengthening the resilience of banks where needed. Decisive steps for establishing an integrated financial framework will help to accomplish this objective.
The future single supervisory mechanism is one of the main building blocks, together with a single resolution mechanism. Both are crucial elements for moving towards re-integrating the banking system.
To sum up, the economic analysis indicates that price developments should remain in line with price stability over the medium term. A cross-check with the signals from the monetary analysis confirms this picture.
While the accommodative monetary policy stance will continue to support the recovery in the euro area, it is essential that fiscal and structural policies strengthen the prospects for economic growth over the medium term. As regards fiscal policies, the European Commission’s 2013 winter forecast reflects progress in reducing fiscal imbalances in the euro area. The euro area-wide general government deficit is expected to have declined from 4.2 percent of GDP in 2011 to 3.5 percent of GDP in 2012 and is projected to be reduced further to 2.8 percent of GDP this year.
Governments should build on this progress with a view to further restoring confidence in the sustainability of public finances. At the same time, fiscal consolidation must be part of a comprehensive structural reform agenda to improve the outlook for job creation, economic growth, and debt sustainability.
In the view of the Governing Council, it is of particular importance at this juncture to address the current high long- term and youth unemployment. To this end, further product and labor market reforms are needed to create new job opportunities by supporting a dynamic, flexible and competitive economic environment.
We are now at your disposal for questions.
STAFF: Alessandro Meli (ph), first (inaudible) first question, please.
QUESTION: Good afternoon. I’m Alessandro Meli (ph) with Sole 24 Ore. I would like to have your comments on the uncertainty created by the recent Italian elections, where most voters voted for parties that reject the fiscal discipline that you advocate. Also, the political system seemed to be dysfunctional. There is no government, for instance, at the moment that could apply for the OMT, if the need arose. That’s the first question.
The second question is about the difficulty of credit in reaching the real economy, especially small- and medium-sized enterprises. And you mentioned the need for integrating the financial system better. I was wondering if, on a shorter term, the ECB is considering other options, like changing collateral requirements or even a scheme akin to the Funding for Lending of the Bank of England.
DRAGHI: Thank you. On the first question, as you’ve seen markets after some excitement, immediately after the elections, have now reverted back more or less to what they were before. I think markets understand that we live in democracies. We are 17 countries. Each country has at least two sets of elections, political, national, and regional. So it makes 24 elections over a time span of about three, four years. So I think that’s democracy, and it’s very dear to all of us.
All in all, right now, markets were less impressed than politicians and you. Also, you have to consider that much of the fiscal adjustment Italy went through is now -- will continue going on, on automatic pilot. And so also the -- if you consider this year, the net supply of government bonds is considerably less than last year’s. If I’m not mistaken, it’s about 30 billion euros. So it’s about much -- it’s very much a matter of rolling over.
Also, all this happens in an environment, in a general environment where we have many signs that confidence to financial markets of the euro area is returning. And if I have to use a word, which I used in the past -- namely contagion -- by the way, I saw that it’s been misinterpreted. I meant contagion between financial markets, not when I spoke about positive contagion, not positive contagion from the financial markets to the real economy, where I’ve always been very careful in explaining that we are actually lagging on that.
But if we look at contagion, you’ve seen, certainly, that the contagion to other countries has been muted this time, contrary to what might have happened about a year-and-a-half ago, and this is another positive sign.
On OMT -- I mean, the rules OMT are what they are. So we will see, and it’s not in our capacity. It’s entirely -- the ball is entirely with the governments. I’ve seen this on and on and on. OMT remains -- is in place. It’s a very effective backstop, and it’s there. But you know the rules. And as I said, the ball is in the governments’ hands.
Now, on credit and fragmentation, no, we are not at this point in time thinking. We obviously -- we always think and study and reflect, but we are not committing or planning anything special. I may say a few more things about credit and fragmentation later, but I’d just respond to your specific question.
STAFF: Jeff Black, Bloomberg, please?
QUESTION: Good afternoon, Mr. Draghi.
DRAGHI: Good afternoon.
QUESTION: Given that you have actually revised downwards the economic outlook, I just wonder if, first of all, you discussed a rate cut today and if everybody on the council was in agreement that you shouldn’t change them today?
And, secondly, given that the confidence recovery hasn’t as yet filtered in any meaningful way into the hard data -- I mean, we saw German factory orders today which was much worse than expected. Are you prepared to say we’re ready to cut, if this does not filter through soon?
And my second question is, to go back to the transmission mechanism, which you have described as the number-one challenge, while the OMT has helped the sovereign bond market, it hasn’t helped, for example, corporate lending, as my colleague referred to. So if you haven’t got anything up your sleeve to repair the transmission mechanism for small companies, small businesses, again, how long will you wait until you decide to take some action there? Thank you.
DRAGHI: Thank you. Thank you. First question is, yes, we have discussed the possibility of doing it, so there was discussion. The prevailing consensus was to leave the rates unchanged. We -- second question is we wouldn’t -- I wouldn’t -- we wouldn’t pre-commit, as you know, to anything specific as -- as a rate cut in the future.
But certainly, let me just go through quickly the outlook and the narrative behind this. As I -- as I said in introductory statement, the downward revision is due to a carryover from a weak fourth quarter of last year. But the recovery path is, by and large, unchanged. And the inflation projections are basically in line with our medium-term price stability objectives, and inflationary expectations are solidly anchored.
We are actually seeing a dichotomy between the hard data, which as you said a moment ago are on average disappointing, and a broad indicator of soft data, of survey data, sentiment data, which almost uniformly are positive.
We also continue seeing mostly positive signs on the financial markets, which witnessed the return of confidence I was mentioning before. Again, funding for banks proceeds well. I’ve said, I think, in introductory statement that we’ve -- we observed a significant strengthening of the deposits even in the banks located in distressed countries.
The funding for sovereigns is also quite well-advanced with respect to last year. TARGET2 balances continue, by and large, to improve. LTRO repayment is another sign of return of confidence. By the way, just in introductory statement, I want you to indicate also the net injection. You remember, the injection of the two LTROs was roughly more than 1 trillion, barely more than a trillion, but that was the gross injection. The net injection was something like 500 billion. And so about 40 percent of that has been repaid, which also -- this squares with the fact that overall balance sheet of the ECB has shrunk now to the minimum, what it was a year ago in March last year, and the access of the banks of the Eurosystem to the Eurosystem credit facility keeps on going down.
So all this points out to less fragmentation. There is increased cross-border activity by other euro area countries and from the rest of the world. The net external asset position of the euro continues to improve. And there are flows from core to non-core countries.
When we talk about credit, you are right, SMEs. There is a lot of heterogeneity here between countries and between companies. The -- the large companies, by and large, had no problem in financing and funding themselves. The SMEs do. And this continues.
So this shows that the situation is still fragile, and it’s fragile more, I would say, in the real economy. And we have to distinguish here, the outlook for the short term shows weak consumption, weak investment overall, and weak domestic demand, high unemployment. But in the medium term, we continue seeing the beginning of a gradual recovery, which is basically caused by three factors -- first, stronger world demand, namely exports; second, our monetary policy stance will remain accommodative as long as needed, and we will remain in full allotment mode and fixed-rate full allotment mode as long as needed.
So we see -- we think that this will, indeed, have a positive contribution, as I said, when all this will find its way through the economy. We see also less fragmentation, but it’s certainly important to continue -- by the national governments to continue with structural reforms.
Also, let me add another factor. Some countries, especially the ones who have front-loaded the fiscal adjustment, will actually see a gradual reduction in the contractionary effects of the fiscal consolidation, and that’s going to be another reason which gradually, by year end, probably, will also contribute to this recovery.
I think you asked -- I think I answered all your questions. Please?
QUESTION: Good afternoon. Two questions. Regarding the inflation expectations, projections, on average, we have 1.6 for this year and 1.3 for next year. So how do you explain us that this is in line with the definition of price stability, which is below, but close to 2 percent? Is 1.3 still in this range of definition? Or, I mean, the (inaudible) what is the credibility of the ECB regarding this objective?
And second question. Can you here rule out that there is no discussion in this house about the role of the ECB in the troika, which is to redefine or maybe quit it?
DRAGHI: Yeah, I gave you ranges for inflation projections for the coming year. We all know exactly -- and I think we have to look through the medium term. So far, we see that our inflationary expectations are firmly anchored. We saw that basically that that is in line with our medium-term objectives of price stability, but we will monitor the situation very, very carefully.
On the troika thing, it’s just -- let me tell you that, because it’s just a -- I mean, I’ve got to start with a joke, because I call it this the angst of the week. Each week, we have an angst. You remember the angst about the enormous size of the balance sheet of the ECB after the two LTROs. Well, you see what’s happening now; it’s shrinking fast.
So each week or about, it’s every two weeks, we have a new angst. And so my suggestion to you is, once you get this from gossips coming from friendly fire, just come over and check with us before you write something that may not exist.
Now, the troika functions very well. We have to look -- the situation is an emergency situation, has been an emergency situation now for several years. Neither the ECB nor the commission were born with the troika. The troika was an organizational arrangement that had been set up to cope with this emergency.
The troika has to look at the whole of Europe, and we believe that the ECB has some value added and some specific competence in the sector of its competence, namely, the financial sector. That’s where the ECB can actually give some value-added. Together, we’ll -- and works very well, by the way, very, very well with the IMF and the commission.
But we should keep in mind, we don’t sign the memoranda. We act in liaison. The MOUs are signed by the IMF and the commission. We act in liaison. So in -- also, our monetary policy responsibilities would demand for us to be part of this team.
Now, if this is used to put in question, as it’s been done, by the way, to put in question -- into question the independence of the ECB, the political independence of the ECB, I can tell you, in all frankness -- and I’m speaking for myself, but I certainly can speak also for the executive board and Governing Council, that we haven’t taken any decision under pressures or political pressures of any kind.
So that’s what -- and I think both myself and the board and the Governing Council have given plenty of evidence of our political independence, because that’s going to be another angst, by the way, our -- our alleged -- our alleged lower political independence, and that’s just -- let me respond to this angst, as well. Thank you.
STAFF: OK (OFF-MIKE) and then we’ll go to (OFF-MIKE) in that row.
QUESTION: Hello, Mr. Draghi. Considering the recent rally in -
DRAGHI: Yes, yes. That’s OK.
QUESTION: - stock markets, do you see a risk at the moment that -- that the cheap money in the system is fueling an asset price bubble? And my second question is going back to your staff projections. Is inflation or deflation the bigger risk at the moment? Thank you.
DRAGHI: Now, the second question is -- I’d answer first the second question. We -- we don’t observe much of a change in the price for ensuring against either inflation or deflation. It’s been -- obviously, it’s not a very liquid market, so one has to take these observations with some caution. And it at times is also volatile, but that’s one thing.
The other thing is that if -- if we mean by deflation a generalized fall in prices across sectors and a self-feeding fall in prices, we have not seen that.
We have seen lower prices for certain products, certain sectors, and certain countries, and higher prices in other countries, by the way. And this is part of the overall rebalancing of the euro area and should be taken, by and large - - not in all cases, but, by and large, should be taken as a good sign.
The other question about, do we fear there’s a bubble, it’s very hard to respond to this question, because you’re asking me whether the stock prices that we’re seeing now are right or wrong. Very hard to say.
Much of this, however, has to -- much of this -- at least as far as euro area is concerned -- has to do with the return of confidence. But the stock prices went up all over. And in other countries, like, for example, in U.S., this has -- might have to do with the increased prospects for a recovery. So I’ll say the question is too difficult to be answered in a clear, unambiguous way.
STAFF: (OFF-MIKE) and Brian? Could you pass over there, please?
QUESTION: Good afternoon. I’m Bart Reiner (ph) from RTL News (ph) from the Netherlands. I have a couple of questions about Dutch bank SNS Reaal. First, what’s your opinion about nationalization? Was it wise to -- in your opinion, to burn all the shares and the subordinated bonds? And, second, were you informed in advance by Minister Dijsselbloem that he would perform this unique decision? Because it’s never done before in Europe.
DRAGHI: OK, let me say that this -- we -- first of all, by and large, I don’t comment on nationalization of banks. But if I have to judge the goals of this was -- the goal of this was to ensure the stability of the Dutch banking system. The government’s comprehensive reform agenda must continue. So this is -- this is what I -- what I say.
The ECB was not informed. And, third, the ECB in other occasions has maintained that the bail-in (ph) of creditors would be an effective way to support the capital position. So bail-in (ph) for the ECB is a good thing, by and large, provided it doesn’t affect financial stability.
So in all these -- in all these issues, you have to find an equilibrium between, on the one hand, debt sustainability, not using taxpayers’ money, and at the same time -- so bail-in (ph) people -- and at the same time, financial stability. Thank you.
QUESTION: Brian Blackstone with the Wall Street Journal.
QUESTION: You mentioned that you’re always thinking and studying about ways to improve the monetary transmission. Could you give us a sense of what you’re thinking about, what you’re studying, what kinds of things out there could improve the transmission? Because your tone today just kind of sounds like there’s not a lot left in the ECB’s toolkit. What types of things are you thinking about could help and you’re just waiting for maybe more evidence that the transmission is broken before you do it?
And, secondly, you’ve made references in the past to the June E.U. summit and the unity of purpose of European leaders. After the Italian elections and some of the uncertainties about the single supervisor, the banking union, French industry minister talking about the ECB should be monetizing debt, do you sense some cracks in this sense of unity that you’ve talked about last year? Thank you.
DRAGHI: Thank you. I’ll answer immediately the second question. No, I don’t. I mean, the unity of purposes of the leaders of the European Council has not been affected at all by all the developments that you mentioned. You may have -- for example -- discordant views within a certain government, by the way, views that have been immediately corrected by the finance minister, immediately by this government.
You can have -- I’m not sure. When you refer to uncertainty about the single supervisor -
QUESTION: Well, is there any -
DRAGHI: What’s this, new?
QUESTION: Has legislation been approved? Is there any -- is there any movement towards it? Does the ECB -
QUESTION: - have a legislative framework (OFF-MIKE)
DRAGHI: Yeah. Yeah. It’s going on. It’s going on. It’s -- I can talk at great length about the SSM, as I now do in each press conference, but I don’t see any news or any reason to be worried about the progress that our legislator, are undertaking, are having in their discussions about the SSM and progress that our preparatory work is actually having. So we’re moving forward. I don’t see much of an issue there.
So the unity of purpose is not in question. And as I said on another occasion, there was -- I mean, many people tend to underestimate the amount of political capital that European leaders have invested in the euro. And they often do at their own cost.
The other question was about what we -- what we do about fragmentation. You said -- at least you sounded as if fragmentation is worsening. It’s not worsening. It’s actually improving. It’s receding. And, again, if I can give you a few data, that would be good.
Well, it’s -- well, I’ve given you a few data about the return of confidence, but there are also data about the spreads of the -- of the -- I mean, the -- yeah, the spreads of the lending rates, the dispersion in the lending rates, the dispersion in the funding rates, and if you compare the last six months with the previous six months, they are all on the decrease.
In other words, the dispersion between the lending rates of different countries, the median dispersion, is now lower than it was in the first six months of last year. Now, not by as much as the dispersion for the -- on the funding side. That has gone down much more. But still we see signs that that is improving.
Now, you have to assess these improvements against the background of a very weak economy, of course. So you can see that where credit remains tight, as I’ve said, where credit flows are weak, so these improvements are bound to be gradual, slow, but they are there, and they are -- by and large, they continue.
No, I don’t have in mind anything specific that I can discuss today, but it’s something -- it’s certainly an issue that’s very close to the Governing Council’s heart, if I can use this word for Governing Council central bankers, but it’s been really -- it’s been close now for quite a time. We consider it important for the transmission of our monetary policy. Thank you.
STAFF: (OFF-MIKE) Irish Times and (OFF-MIKE)
QUESTION: Hello. Suzanne Lynch (ph) here from the Irish Times. Just a question on Ireland. Christine Lagarde said this morning in an interview -- she raised concerns about a certain complacency in relation to Ireland. And a risk of relapse (inaudible) do you share this concern? And do you think Ireland does need some kind of support mechanism to help exit the bailout? And is OMT a suitable instrument for that?
DRAGHI: I’ll respond first to the second question. You know the rules of OMT. You know that OMT cannot be used to enhance the return to the market. But in principle, there are rules that are there, and countries that comply with these rules are eligible.
The Irish government has undertaken a very, very significant progress and very significant results on several fronts, and I never tire of saying so. There are -- further action is needed, especially on the banking side, on the financial sector front. And I think that’s what probably Madam Lagarde was suggesting to the Irish government. It’s not time to rest. It’s not time to be complacent, but continue the effort with the same effectiveness that has characterized the action of this -- of the Irish government in the past.
STAFF: Sebastian (ph)?
QUESTION: Sebastian (ph) (OFF-MIKE) I have a question regarding Cyprus. There have been reports about further capital flight during February from the banks in Cyprus. How do you consider the situation there? Is the flight of deposits concerning with regard to the financial stability in the country? And to what -- can you give us an idea, to what extent the Governing Council will accept an increasing amount of ELA (ph) to fill up the funding gap at Cyprian banks? Thank you.
DRAGHI: Now, what I can say is that there is good progress. In terms of exactly assessing the progress, I would suggest you read the Eurogroup statement, the second statement, hinting at the possibility there will a program by the second part of March.
We have to keep in mind that the solution has to reflect two equally important dimensions. One is the debt sustainability, and the other one is financial stability. And the Eurogroup should -- is actually working on both of them quite actively.
The -- there are two considerations to make. The Cyprus economy is a small economy, but the risks -- the systemic risks may not be small. At the same time, our union is not a transfer union. So we have to keep this in mind.
Finally, let me touch on something that it’s not exactly in the -- in the -- in the -- under the competence of the ECB, but I think I judge it to be very, very important. It’s very important that the Cyprus government takes this opportunity to revisit the anti-money laundering legislation, not so much in terms of legislation, but actually accepting an international oversight on how effectively this legislation has been implemented.
QUESTION: (OFF-MIKE) Market News. And then Michael Steen, FT, please.
QUESTION: (inaudible) Market News. Mr. Draghi, you’ve repeatedly emphasized the importance of the transmission mechanism, as have a number of your colleagues in the past. Can we infer from that that you would actually implement additional non-standard measures to help improve that transmission mechanism before cutting rates again? Because what would be the point if it doesn’t actually reach the real economy?
My second question is, you said that you had no immediate plans to launch policy to -- policies to kick-start lending to the real economy, but that you’re studying options. I’m wondering, in those studies, are you focusing particularly on policies that would see the ECB work in tandem with the governments or at least seek indemnities? Or are you studying -- are you focusing more on options in which the ECB would go alone? Thank you very much.
DRAGHI: Well, you’re asking questions I really can’t answer. What I can say is that the fragmentation has become -- well, has been now for quite a while -- although, as I said, it’s receding -- or has been an obstacle to our monetary policy. Having said that, if you think deeply about that, you would be bound to conclude that it’s the outcome of many, many factors, most of which the ECB can do very, very little about.
You should remember that the fragmentation started with the sovereign debt crisis that later propagated to the banking system. And so I said many times that there are three reasons why banks don’t lend. One of them is lack of funding. And we have addressed this squarely, and I think we’ve resolved that.
The second thing is lack of capital or, put it differently, the quality of the assets that the banks have in their balance sheets. There isn’t much we can do about that, as I -- as I think I said last week, the ECB is not in the business of cleaning banks’ balance sheets. So that’s the second reason.
The third reason is about risk aversion. And now it’s quite clear that with a deteriorating economy, the nonperforming loans increase and the risk aversion by the banks goes up and further restricts lending.
Now, on that front, it’s -- as I said, we are really thinking 360 degrees, and so we will -- and we’ll continue reflecting. But if we go back to when things were normal, we certainly remember that -- well, right now, right now, what banks do is they look at the yields they can get on government bonds, and then they buy bonds or lend to the private sector at a much higher rate than the government bonds yield. So credit is either very unduly expensive often, given the quality of the client, or it’s not there, either.
So in other times, in other times, you had the banks of other parts of the euro area which would jump in to this and having an opportunity to either buy government bonds themselves or other countries so that their yields will go down and the domestic banks then would have more incentive to lend to the private sector or, more rarely, the other -- the other countries’ banks would lend directly to the SMEs.
Now we don’t see that. Why is that? Because it’s fragmented. The system is fragmented, so we see -- so any sign of overcoming this fragmentation through higher cross-country credit flows is a good sign towards a better transmission of our monetary transmission into lending rates, into the real economy.
STAFF: Michael Steen -- Michael, just in front, Michael.
QUESTION: Michael Steen, Financial Times. Mr. Draghi, you just said that we know the rules on OMT. I don’t think I’m alone in saying actually I don’t think we do. The only thing I’m aware of that you’ve published is a 440-ish-word statement that you read out to us in September. And other than that, it feels a bit like we pieced it together slowly and slowly.
So would you consider giving us -- at some point, a written full, you know, point-by-point, this is how it works, this is what a country must do? Or is this a deliberate policy to keep it a little bit vague?
DRAGHI: No, I’m not sure -- I’m not sure I understand your question. I mean, I think by now -- by now, in fact, you’ve stopped asking questions about how the OMT works, because you understood how it works. I mean, we’ve gone through all the conditions that would make a country eligible for OMT, and we said that this would be a necessary, but not a sufficient condition for the ECB to step in, and we listed the conditions. We said that -- we specified the role of the SSM, of the IMF, and so on -- I don’t want to go through this again and again.
QUESTION: OK. Yeah.
DRAGHI: If you’re referring to the legal documentation, that’s a different thing. We’re still working on it.
DRAGHI: And it’s coming out, but it’s -- but that’s it. But, I mean, in terms of how it works -
QUESTION: Well, I mean, I think I have a broad understanding, but, for example -
DRAGHI: No, well, I’m surprised it’s still so broad.
QUESTION: But, for example, on the question of whether a country can use it when it’s returning to the bond markets or not, I’d have to go back and check your exact words, but at one point, it sounded like that it was valid for countries that were returning to the market, but you just said just now that actually it’s not something that should be used to enhance a return to the market.
DRAGHI: Exactly. Exactly. Countries should be on the market by themselves. So they should be on the market by themselves. To be on the market, I think I clarified what we mean, being able to issue along the yield curve, being able to issue to a certain fairly broad category of investors, so -- and being able to issue certain quantities.
That is -- the OMT had never been thought or created to support countries in their access, in their return to the market, or access to the market. OMT was meant -- you remember - - it’s an effective backstop that will remove and has removed the tail risks from the euro area.
QUESTION: OK, thanks. My other question, quickly -
DRAGHI: Ah, OK.
QUESTION: Just to return to a former angst of the week, which I don’t think you’ve mentioned today, is the euro. Is the -- the current level of the euro OK? Has the risk of appreciation receded? Have you got any comment on that? Thanks.
DRAGHI: Well, I -- I mean, let me just go through something that must be dear to your heart. I won’t read it all, but I say the G-20 communique says, we reiterate our commitments to move more rapidly towards more market determined exchange rate system, exchange rate flexibility to reflect underlying fundamentals and avoid persistent exchange rate misalignments and, in this regard, work more closely with one another so we can grow together.
Also, ministers committed not to comment on that. And so I won’t -- I won’t be the first to violate this -- this commitment. But as I said, the exchange rate is not a policy target for us. The nominal and real effective exchange rates are -- by and large continue to be along their long-term averages.
However, the exchange rate, as we’ve seen, by the way, in the last -- in the last fourth quarter of last year, when we found -- when we had a weaker fourth quarter, the exchange rate is very important for growth and price stability. And so we will continue to look at that. It certainly is part of our overall assessment of the current situation. But as I said, we stick with the G-20 consensus on that.
DRAGHI: By the way, I won’t repeat my statement about the fruitless chatter. That was the other part, if (inaudible) comment on other people’s statements on exchange rates. Thank you.
QUESTION: Thank you. I just want to come back to inflation. As the midpoint of the projections are well below the 2 percent and this might increase discussion whether the ECB should be more worried about deflation than inflation, could you just tell us a little bit more about the profile of inflation during the next two years? What do you expect? When will it hit its low? And when will it be at or above 2 percent again? Thank you.
DRAGHI: Well, I think the introductory statement says something about the macroeconomic projections on the -- of inflation. It says ECB staff macroeconomic projections for the euro area foresee annual HICP inflation in a range between 1.2 percent and 2.0 percent in 2013 and between 0.6 percent and 2.0 percent in 2014.
So in comparison with December 2012, Eurosystem staff macroeconomic projections, the ranges are broadly unchanged. The risks continue to be broadly balanced over the medium term, with upside risks relating to stronger-than-expected increases in administrative prices, indirect taxes, oil prices, and downside risks stemming from weaker economic activity.
And also, let me add what I said before, which is not -- doesn’t apply mechanically to our situation today, but I also said that the exchange rate, if the sustained appreciation of the exchange rate has the potential to alter our risk assessment about inflation. Thank you.
QUESTION: Mr. Draghi (inaudible) I have two questions. My first question is about a possible free trade area agreement between the United States and the euro zone, which is in the works apparently. I’d like to know what the -- what the ECB makes of it, whether this is something that is -- has been discussed, and whether it could substantially boost growth prospects for the euro area?
And my second question touches upon, again, the Italian elections. You said the OMT is there and the election outcome is democracy. But it’s difficult to ignore that market participants and observers are wondering whether political developments in Italy might hamper the effectiveness of the ESM and the OMT by making it difficult for a government to sign the memorandum of understanding. So I’d like to know what your stance is on this issue and whether this is an issue that’s been discussed. Thank you.
DRAGHI: Thank you. The first question is really -- we don’t discuss this. We don’t discuss trade. But the -- I’d say the culture of the Governing Council of the ECB is one that, if I were to guess my colleagues’ minds, would say that the free trade area would be a source of growth and job creation.
Of course -- and I think it’s very -- some very good work is being done there by others -- of course, everything ought to be also consistent with the multilateral commitments and engagements in which we are -- all of us are.
On the second point, I’m not sure I understand. I think this is another angst. In other words, you’re asking me to respond to something that doesn’t exist. And so I have no response on that. It’s -- we know what the OMT is. We know the rules. It’s there, and that’s it. Thank you.
STAFF: Jack Ewing, International Herald Tribune?
QUESTION: Mr. Draghi, you mentioned in your statement youth unemployment. Given that inflation is now well below your target, is there perhaps more room within your price stability mandate to pay more attention to macroeconomic factors, like unemployment and growth, as some other major central banks are doing? Thank you.
DRAGHI: Thank you. The -- on another occasion, on another occasion, I remarked that the very high level of youth unemployment -- by the way, unemployment is a tragedy, and the youth unemployment is an even bigger tragedy, as we see today. But we should ask ourselves why the -- why the unemployment is so high, mostly young people? And the answer often, why it’s not uniformly high, as it should be in a situation of such weak demand?
And the answer is, it has to do with labor legislations in these countries which has been -- have basically put all the weight of flexibility upon the young people. And there is very little the ECB can do about that.
But more -- on the more general question you asked, we view that maintaining -- we view maintaining price stability in both directions as the best way to support the real economy and job creation and growth. And, of course, as I’ve said before, we have to resolve, address, and see what we can do, and it’s not clear we can do much, but we have to address the problem of transmission of our monetary policy through the real economy.
As I said before, our monetary policy will remain accommodative as long as needed in -- and then will stay in the full allotment mode, and we’ll also monitor carefully our markets, credit markets and Eonia market, both spot and forward. Thank you.
STAFF: (inaudible) and then we’ll go to (inaudible) afterwards.
QUESTION: Thank you (inaudible) last month, you said that on the Irish promissory note, the last word has not been spoken so far. So I wonder, when will we hear the last word?
DRAGHI: We have -- we have a review, a periodic review of compliance with article one, two, three by all countries. If I’m not mistaken, the review should happen year end. But the Governing Council will decide in complete independence when to have this review or review of similar situations at any time, if we want.
I don’t have a date immediately, anyway, to tell you now. I think there is a date when this is certainly going to be done, and I believe it’s the year end, but I can let you know for sure.
QUESTION: (inaudible) Mr. Draghi, I want to come back to Italy. Given the instability after the Italian election, are you afraid Italy might leave the way of austerity?
And second question is, how big is the likelihood in your eyes that Italy can leaving the euro zone after a referendum or something else?
DRAGHI: Well, you see, I -- you’re asking me if I’m afraid. You’re asking me how likely it is. I cannot answer to these questions, but I can tell you that Italy, like all the other countries, should continue on -- first, on the structural reform path, which is the only way that can restore growth, and, second, build on the very significant fiscal consolidation that has reached. That is -- that is very important, because that’s what gives credibility in the markets, therefore, lowers spreads, and, therefore, in the end, lower lending rates, therefore, more credit to the economy and more job creation. And this is the path.
STAFF: We have the last question to (inaudible) CNBC, please. Over here.
QUESTION: Mr. Draghi, you talked about the risks that euro exchange rate can pose to your growth and inflation outlook. Can I just confirm that -- again, that at the levels that we’re seeing in the euro exchange rate right now, you’re not seeing any major risks to your growth and inflation outlook?
And my second question would be whether the Governing Council has actually discussed a cut in the deposit rate and what you think the biggest risks are, if you implemented a negative deposit rate? Thank you.
DRAGHI: Thank you. As you can imagine, I can’t respond to the first question. We never really comment on exchange rates, even less so about levels of exchange rate, whether a certain level is appropriate or not.
The second -- the second question is -- I mean, the answer to the second question is -- is the following. We’ve looked at that. And we’ve looked at that. And we don’t -- I mean, we don’t commit to do anything. The unintended consequences of a measure like that can be serious, as it has been shown on other -- in other monetary jurisdictions by similar experiences.
So all in all, I think in the past I’ve used the words uncharted waters, if we are to get into that -- to that mode. Thank you.
STAFF: Thank you.
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