Following is a transcript of European Central Bank President Mario Draghi’s comments from his monthly news conference in Bratislava today:
MARIO DRAGHI, PRESIDENT, EUROPEAN CENTRAL BANK: Ladies and gentlemen, the vice president and I are very, very pleased to welcome you to our press conference. I would like to thank Governor Makuch for his kind hospitality and express our special gratitude to his staff for the excellent organization of today’s meeting of the Governing Council.
We will now report on the outcome of today’s meeting, during which we took a number of decisions on key ECB interest rates, liquidity provision, and possible ways forward to enhance provision of credit. The meeting was also attended by the commission vice president, Mr. Rehn.
First, based on our regular economic and monetary analysis, we decided to lower the interest rate on the main refinancing operations of the Eurosystem by 25 basis points to 0.50 percent and the rate on the marginal lending facility by 50 basis points to 1 percent. The rate on the deposit facility will remain unchanged at zero.
These decisions are consistent with low underlying price pressure over the medium term. Inflation expectations for the euro area continue to be firmly anchored, in line with our aim of maintaining inflation rates below but close to 2 percent over the medium term.
In keeping with this picture, monetary and loan dynamics remain subdued. At the same time, weak economic sentiment has extended into spring of this year. The cut in interest rates should contribute to support prospects for a recovery later in the year.
Against this overall background, our monetary policy stance will remain accommodative for as long as needed. In the period ahead, we will monitor very closely all incoming information on economic and monetary developments and assess any impact on the outlook for price stability.
Second, we are closely monitoring money market conditions and their potential impact on our monetary policy stance and its transmission to the economy. In this context, we decided today to continue conducting the main refinancing operations as fixed- rate tender procedures with full allotment for as long as necessary and at least until the end of the sixth maintenance period of 2014 on 8 July 2014, so at least until the 8th of July of 2014.
This procedure will also remain in use for the Eurosystem’s special term refinancing operations with the maturity of one maintenance period, which will continue to be conducted for as long as needed and at least until the end of the second quarter of 2014.
The fixed-rate in these special term refinancing operations will be the same as the MRO rate prevailing at the time. Furthermore, we decided to conduct the three-month longer-term refinancing operations, LTROs, to be allotted until the end of the second quarter of 2014, as fixed-rate tender procedures with full allotment. The rates in these three-month operations will be fixed at the average rate of the MROs over the life of the respective LTROs.
Third, the Governing Council decided to start consultations with other European institutions on initiatives to promote a functioning market for asset-backed securities collateralized by loans to non-financial corporations. In the meantime, it is essential for governments to intensify the implementation of structural reforms at national level, building on progress made in fiscal consolidation and proceeding with bank recapitalization where needed. Furthermore, they should maintain the momentum towards a genuine economic and monetary union, including the swift implementation of the banking union.
Let me now explain our assessment in greater detail, starting with the economic analysis. Real GDP contracted by 0.6 percent in the fourth quarter of 2012, following a decline of 0.1 percent in the third quarter. Output has thus declined for five consecutive quarters. Overall, labor market conditions remain weak. Recent developments in short-term indicators, notably survey data, indicate that weak economic sentiment has extended into spring of this year.
Looking ahead, euro area export growth should benefit from a recovery in global demand and our monetary policy stance should contribute to support domestic demand. Furthermore, the improvements in financial markets seen since last summer should work their way through to the real economy. At the same time, necessary balance sheet adjustments in the public and private sectors will continue to weigh on economic activity. Overall, euro area economic activity should stabilize and recover gradually in the second half of the year.
The risks surrounding the economic outlook for the euro area continue to be on the downside. They include the possibility of even weaker than expected domestic and global demand and slow or insufficient implementation of structural reforms in the euro area. These factors have the potential to dampen confidence and thereby delay the recovery.
According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.2 percent in April 2013, down from 1.7 percent in March. This decline in the annual inflation rate reflects a significant fall in energy prices, but it’s also due to a sizeable transitory effect coming from the annual rate of change in services prices on account of the timing of Easter.
Inflation rates could remain subject to some volatility throughout the year. Looking further ahead, underlying price trends should persist and, over the medium term, inflation expectations remain firmly anchored in line with price stability.
Taking into account today’s decisions, risks to the outlook for price developments are 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 commodity prices and downside risks stemming from weaker economic activity.
Turning to the monetary analysis, recent data confirm that the underlying pace of monetary expansion continues to be subdued. Annual growth in broad money moderated in March, standing at 2.6 percent, after 3.1 percent in February. The annual growth rate of the narrow monetary aggregate, M1, increased slightly further to 7.1 percent in March, reflecting the continued preference for the most liquid instruments in M3. Deposits with the domestic money-holding sector continued to grow further in most stressed countries in March.
The annual growth rates of loans - of loans to non- financial corporations and households have now remained broadly unchanged since the turn of the year, standing in March at minus 1.3 percent and 0.4 percent respectively. To a large extent, weak 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.
The recent Bank Lending Survey confirmed weak demand for loans in the euro area. While some signs of stabilization are emerging, the survey on the access to finance of small- and medium-sized enterprises in euro area indicates continued tight credit conditions, particularly for SMEs in several euro area countries. Moreover, the available information indicates high risk perception on the part of banks.
In order to ensure adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential that the fragmentation of euro area credit markets continue to decline further and that the resilience of banks is strengthened where needed. Progress has been made since last summer in improving the funding situation of banks, in strengthening the domestic deposit base in stressed countries, and in reducing reliance on the Eurosystem as reflected in repayments of the three-year LTROs.
Further decisive steps for establishing a banking union will help to accomplish this objective. In particular, the Governing Council emphasizes that the future Single Supervisory Mechanism and a Single Resolution Mechanism are crucial elements for moving towards reintegrating the banking system and, therefore, require swift implementation.
To sum up, taking into account today’s decisions, 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.
With regard to fiscal policies, the spring 2013 deficit and debt data notifications by euro area countries indicate that the average government deficit declined from 4.2 percent of GDP in 2011 to 3.7 percent in 2012. Over the same period, the average government debt rose from 87.3 percent to 90.6 percent of GDP.
In order to bring the debt ratios back to - on a downward path, euro area countries should not unravel their efforts to reduce government budget deficits and continue, where needed, to take legislative action or otherwise promptly implement structural reforms in such a way as to mutually reinforce fiscal sustainability and economic growth potential. Such structural reforms should target improvements in competitiveness and adjustment capacities, as well as aim to increase sustainable growth and employment.
And now we are at your disposal for questions.
STAFF: In honor of our host country, we’ll take the first question today from Tomas Viletski (ph), Televizia Markiza. Hang on just one second. Can we just have some time to put on the - yeah, thank you.
QUESTION: (SPEAKING FOREIGN LANGUAGE)
DRAGHI: I can’t hear you. OK. OK.
QUESTION: (SPEAKING FOREIGN LANGUAGE)
DRAGHI: Well, the Governing Council has taken this decision consistent with the low price pressure over the medium term. And as I said in the introductory statement, HICP inflation went down considerably. And, by the way, even though if you look at the HICP inflation without food and energy, it did go down, as well, but less so, less so markedly.
Inflation expectations are well anchored in the medium term. As I said, monetary and credit developments have been subdued. Weakness of the fourth quarter in 2012 extended itself into the first part of this year. So all in all, the Governing Council decided to go for a cut of 25 basis points, accompanied, however - and I would invite you not to underestimate the importance of the other measure - by the maintained fixed-rate full allotment policy for until - at least until the mid-July - the July of next year. The - so the combination of the two measures is especially important, and we can discuss it in the coming questions.
At the same time, we will certainly - and this answers your last part of your question - we’ll certainly look at all the incoming data and we’ll monitor carefully developments. And as I said last time, we stand ready to act, if needed.
STAFF: The next question we’ll take will be from Veronica Jabazo (ph). Can we have the microphone over there?
QUESTION: Good morning, President Draghi. Veronica Jabazo, TVCom Ventiquatro (ph). What could be now the effects in the cuts of interest rates? There’s no risk of an inflection (ph), as you said before.
DRAGHI: Well, we - we act consistently with our - with our analysis of the price developments and the objective of maintaining price stability in the medium term. The weak developments on the real side of the economy and on the monetary and credit side granted action by the ECB, which today was basically founded on the decision we’ve taken of cut rates of 25 basis points and, as I said, the fixed - the maintaining of fixed-rate full allotment policy at least until July of next year.
This means that, especially the - well, the combination of the two measures is very - is important by itself. It ensures the smooth transmission of our monetary policy to money markets. It - the fixed-rate full allotment will basically represent a liquidity insurance for the banking system, so, frankly, there can’t be fears of lack of funding as an excuse for not lending.
And so - and so - and at the same time, we believe that the restriction of the corridor will also dampen the volatility of the EONIA rate. In other words, this is a measure that benefits all kinds of banks, the banks that borrow at EONIA, the banks - the middle-tier banks that don’t have access to money markets but borrow at the MRO, and the banks that are under ELA and basically that are restricted in their collateral.
In this sense, this measure is addressed to all - all the - all the different sets of banks, really. And we believe that this measure taken now is going to be fully effective for at least two reasons that I will explain later, if you want. One is that we’ve seen signs that fragmentation is receding. And the other reason is that this weakness in economic activity and the revised price stability projections for the medium term are also now affecting not only non-core economies, where one might have had doubts about the transmission of monetary policy mechanisms, but also core economies, where these issues of transmission of monetary policy mechanisms were never there.
So basically, it is addressed to a broad set of banks, and we believe it’s going to be more effective today than it would have been a few months ago. Thank you.
STAFF: The next question from Michael Steen, Financial Times.
QUESTION: Yeah, Michael Steen, Financial Times. Mr. Draghi, would you say today’s rate cut is too little, too late? We’ve got unemployment at a record high. There was this sudden fall in inflation this month. I mean, from what you just said, it sounded a bit like you were implying that you see that as a one-month blip in the data on inflation, although you’re expecting volatility over the year, if you could say a bit more on that.
The second question is, are you the - the last austerity hardliners left standing? You had an interesting part at the end of your statement there about where government debt levels are - and deficits. And obviously, this has been a subject in the last few weeks, the austerity versus growth debate. Do you feel like you’re the only ones left arguing that we need to keep on with fiscal consolidation?
And if I can just crowbar in a last question -
DRAGHI: No. How many questions?
QUESTION: That was two.
DRAGHI: Two. So I’m answering the first two questions.
DRAGHI: Let me just remind all of us that monetary policy by the ECB has been extraordinarily accommodative all throughout. And just to give you the sense of the - of how much has been accommodative, the - look at the financing - how the financing conditions changed. The - if we look at changes since the 25th of July, we see that stock markets went up in Germany, France, Italy, Spain, from 22 percent to 38 percent. And even in the last month only, stock markets went up again in Italy and specific by something between 5 percent and 10 percent.
TARGET2 balances have decreased. You know, when TARGET2 balances decreased, that’s the best sign we have that you have a return of confidence - gradual, of course. Given the seriousness and the gravity of the previous situation, you wouldn’t expect a change to take place all of a sudden. So it’s a gradual process. And they are now about - if I’m not mistaken - 256 billion - 256 billion off their peak.
The 10-year sovereign bond yields, they went down for distressed countries by something between 200 and 300 basis - more than 200 and 300 basis points, and even for France by 53 basis points. So these are measures that by themselves describe a - I would call a very significant easing in the financing conditions.
And I can go on. I mean, the EONIA now - the banks that finance themselves in the interbank market pay something like seven, six, seven basis points. So one - almost zero, basically, that one cannot say that the monetary policy hasn’t been accommodative.
But this takes into account - the decision we’ve taken today takes into account evidence. As I said, we look at the data. We monitor it closely. And we stand ready to act when needed. We also had increasing evidence, as I said a minute ago, that this action now through standard monetary policy measures would be more effective than it would have been a few months ago.
Now, on austerity versus growth, this is - I think it’s an interesting debate, but I think one should make a few points. The first thing is, let’s not forget how the crisis started. The crisis has two stages, I would say. The first is - the first stage is when, after the financial crisis, we all discovered the certain positions either in the bank capital ratios or in the government budget and deficit ratios were not sustainable. This was the first stage.
So at that point, governments started to do, belatedly, some fiscal correction. Then you have a second stage when you have expectations - self-fulfilling expectations of disruptive scenario - or what we call tail risk - taking momentum. So we got rid of this through the OMT, and so we are left with the memory of the previous situation. I’m sure that no government wants to be there again.
So what the message that the ECB is giving - and it’s been giving now for a while - first, don’t unravel the progresses that you have achieved. And there is no doubt that progress - significant progress has been achieved in fiscal consolidation all throughout the euro area. Don’t unravel that.
Second, fiscal consolidation is - and I’ve said this since the very beginning of my tenure - is contractionary in the short term and the medium term, as well. So you want to mitigate this; you want to take action to mitigate the contractionary effects.
How do you do that? Well, we gave three indications. First of all, do fiscally consolidate basing - based on reductions of current expenditures, rather than tax increases. Unfortunately, many of the fiscal consolidations took place under emergency. And under an emergency situation, most governments really chose the simplest route, which is the one of raising taxes. Here we are talking about raising taxes in an area of the world where taxes are already very high. So no wonder this had a contractionary effect. Now that there is more time, this could be rebalanced into having lower current government expenditure and lower taxes.
Second, a key issue in fiscal consolidation is credibility, and credibility in multi-year fiscal consolidation plans is ensured by having detailed medium-term fiscal consolidation framework. There are countries in the euro area - not only in the euro area, but in the union - which actually have very good, very credible structural fiscal consolidations - structural and nominal, I mean, fiscal consolidation frameworks. And they have been rewarded. They’ve been rewarded by much, much lower interest rates on their sovereign bonds.
And, third, just proceed with structural reforms. Many of the problems that we see today in competitiveness in the labor markets, in the tax area don’t have anything to do with monetary policy. Neither can be fixed by monetary policy, but can be fixed only changing what is wrong in these three areas, at least. So that’s - that’s how I would cast this discussion between austerity and growth.
QUESTION: OK, could I just quickly follow up on that, just - the -
DRAGHI: Finally, let me add another thing. Let me add another thing, that we discussed several times the fragmentation and the - and the - and the difference in lending rates across the area and so on. A key step here is to - as the introductory statement is to say - a swift implementation of the banking union through the establishment of the SSM, the Single Supervisory Mechanism, as quickly as possible. Thank you.
STAFF: We’ll have Michael Shields from Reuters, please.
DRAGHI: I was just wondering how long it would take to get this question, that - it’s - I would say that there was a - there was a very, very strong pervading consensus towards an interest rate cut, and within that, there was a prevailing consensus for a cut of only 25 basis points. I think that is the - thank you.
STAFF: Brian Blackstone, Wall Street Journal?
QUESTION: Brian Blackstone, Wall Street Journal. When you said there was a prevailing consensus of only 25 basis points, you stand ready to act, could interest rates - is there room to cut interest rates further, including the deposit rate, which you didn’t touch today?
And I wanted to ask you a bit on this - these consultations that you’re starting on creating a market for asset-backed securities. What exactly do you have in mind? And are you potentially solving one problem by creating an entirely new problem, given that asset-backed securities were at the root of the - at least in the U.S., the financial crisis of 2008 and 2009? So if - are you potentially just creating a headache down the road if you - if you go down this route? Thank you.
DRAGHI: Thank you. On the first part, I think of the very first part of your question, I think I did respond before, saying that we’ll look - we’ll look at all the incoming data. We’ll monitor - we’ll monitor them closely, and we’ll stand ready to act, if needed.
On the deposit facility rate, we said that in the past we are technically ready. There are several unintended consequences that may stem from this measure. We will address and cope with these consequences, if we decide to act. And we will, again, look at this with an open mind and stand ready to act, if needed.
On the other part is actually the - I made reference to that, but as a matter of fact, no standard measures category, it’s actually broader than that. And it - it relates to funding measures, broadly - broadly defined, one of which is collateral. The second - and the second - the second set has to do with purchases of assets.
Now, got to be careful here, because the - what the ECB - let me say once again, what the ECB cannot do, the ECB certainly cannot do - cannot supplant governments for their lack of structural reforms. So that’s one thing. Second thing is, the ECB cannot clean banks’ balance sheets. And the third thing is that the ECB is not in the business of monetary financing, so buying government bonds.
So when you consider all this, you look at what assets could be purchased, and - and you are left with - no, before - before saying that, you ask yourself this question, and then you look at what sort of financial infrastructure the Europeans have, and it’s different from the United States. In the United States, 80 percent of credit intermediation goes via the capital market. Capital markets rate and price assets in a right or wrong way, but it’s fairly transparent.
In the European situation, it’s the other way around; 80 percent of financial intermediation goes through the banking system. So you are left with buying what? SME loans, residential mortgages, and mortgages to non-residential, and a few other types of loans.
Now, you can - you can see this makes the problem much more complicated. You want to - if one decides to take this way - and really, all the options are still very open here. By the way, let me say - let me say that our thinking is very much in the preliminary stage, given the complexity of the issue. And so it’s - we haven’t reached any conclusion either way.
But if you - if you go this way, you want to find - you want to find a way of packaging these loans in a way that they can be priced. And that’s where the reference to other institutions more suited for this - for this job of packaging and guaranteeing the loans comes in, the reference to the European Investment Bank and the reference to the commission, European Commission itself, so that’s why I - I’m not sure - also, the ABS, you are absolutely right. The ABS has a very bad name.
But one should say that there were very different kinds of ABS’s. One was the so-called plain-vanilla ABS, which is a box, you open the box, you see what is inside, and you know exactly what’s inside. So if you, for example, put some mortgages there, it would be like a covered bond.
A different thing was the ABS, the squared ABS and all this, that we are infamously known to have - to be - to have been one of the causes for disruption of the financial markets of the last few years. So - but in any event, we - as I said, we haven’t - we are far from reaching any conclusion. We are looking at all possible options. We are aware of the importance of this. We’re also aware of what we can do and cannot do.
STAFF: Stefan Riecher, Bloomberg.
QUESTION: Stefan Riecher, Bloomberg. Can you hear me? Mr. Draghi, today you cut interest rates and the euro rose at first. Now it just turned around after your comments about the deposit rate. So my question would be, is there a reason for concern? And is deposit rates more important, do you think, that the benchmark rates?
DRAGHI: I’m sorry. I didn’t hear you.
QUESTION: Is the deposit rates for investors apparently more important than a benchmark rate after the euro dropped now after your comments about the deposit rate? So my question would be, is there reason for concern, basically, that the euro rose at first about the benchmark rate and then it dropped about the deposit rate?
And second question. Angela Merkel recently said that, actually, if you speak about Germany, you would have to raise interest rates. What do you make of those comments? And is she correct? Thank you.
DRAGHI: Well, the first part I really don’t have much to say. I mean, I’m obviously aware the markets read and understand and try to interpret any - any remark that - that the president of the ECB makes in these press conferences. But we should never forget that our objective is maintaining price stability in the medium term and not being caught by the market reactions. That’s the - that’s very important to remember.
And - and in this case, of course, besides price stability, we see the weak economy and the weakness that it - that continues to linger over the first part of this year. The - sorry, the second question was -
DRAGHI: Yeah. Well, that - I think, first of all, ECB independence is dear to all, and especially, I would say, to German citizens.
DRAGHI: Excuse me? Second, I think too much was made of that comment. The comment really - if you take it literally - meant to say, look, we have a different situation here in the euro area. We have 17 countries. And the business cycle of these 17 countries is not exactly the same. They are not completely synchronous. Actually, they’re not synchronous and they differ very much across the area.
So monetary policy measures which can be sort of benefiting some may not benefit in others. We think that, given the extending weakness to the core economies, as well, we think it does benefit everybody, but it was not a comment meant to - I don’t think so, at least - it was not a comment meant to infringe upon the independence of the Governing Council. I’m - I’m absolutely sure of that. Thank you.
STAFF: Stefan Ruhkamp, Frankfurter Allgemeinen Zeitung?
QUESTION: Thank you. Hello. You described how the OMT program brought calm to the financial system during the last six or seven months. And we saw how the rates of sovereign bonds came down significantly. But we didn’t see that the rates for small- and medium-sized companies came down. Could you explain why that didn’t happen and what does it mean for the OMT as an instrument to address the fragmentation problem?
And my second question is about this ABS program you indicated. Did I get you right that - that it’s - that the ECB is thinking about buying ABS, something like this? Or is it all about collateral and lending?
DRAGHI: No, I - no, I don’t think - on the second question, no, I don’t think you got it right. We are simply working - we have a task force with the EIB. We view these institutions as - as the best suited to do things in this field.
We don’t have a precise view of what to do - and also, you have to consider that the ABS market is dead and has been dead for a long time. And this is so for a variety of reasons, one of which is also the regulatory situation of ABS. The other one is that very low interest rates don’t make the ABS an especially convenient instrument to fund an institution.
So there are many - what I’m saying is, there are many obstacles before we can actually - I would be able - before for me being able to give you a precise description of what - what we have - what we have in mind.
On the - well, you know, OMT removed the tail risk, and that’s been - that’s been a very powerful instrument for doing that. But we should not forget that the funding crisis that the banks experienced, which dated back to mid-2011, caused a credit contraction which - of which we are victims even today.
So it’s been a gradual, slow and long process of credit contraction. The two LTROs avoided a worsening -- the collapse, I think, of the situation, and then OMT removed the tail risks for the euro area, but then you have to gradually unravel the fragmentation that had taken place before the OMT and at the end -- and, as I said, starts really by September 2011.
However, to say that all is -- all is bad wouldn’t be correct. And I just -- let me give you a few -- a few facts on what is the current -- or better, how we view the current state of fragmentation. You -- I think as I said another time, you have two sides to fragmentation. You have the funding side and the lending side.
Now, we see progress -- definitely progress on the funding side. And this progress is documented by the fact that domestic deposits continue to go up in all the banks of all the stressed countries, or almost all, I think. Second, the dispersion in the growth rate of deposits -- so you look at how fast these deposits grow, you look at the dispersion of these growth rates across countries, and you see that this continues to go down month after month, and now is at its lowest since May 2010. This is quite important, now, this dispersion.
Third, capital inflows continue to happen, which is also the other side of the coin of why the euro gets -- in spite of the weakness of the economy, in spite of the low price path continues to be strong.
Fourth -- it’s the other side. In other words, it’s the other side of the return of confidence, really. Fourth, the claims on the Eurosystem by the central banks continue to go down, and since July 2012, they went down by 400 billion euros. And incidentally, we haven’t seen any of the awful, terrible risks that were predicated at the time.
Finally, the TARGET2 (inaudible) also down, but they have stabilized. However, do we say the fragmentation on the funding side is over, that everything is normal? No. No. And there is an interesting fact that was pointed out to me this morning, is the same bank issued a bond in Munich and issued a bond in Milan, and it’s a senior bond, uncollateralized, so it’s not a covered bond, and there was a spread of, I think, roughly 150, 200 basis points difference between the two, so it’s the same bank issuing in two different sovereign jurisdictions.
So it’s not -- on the lending side, progress is more muted. But here I would point out to something that could be -- could be a source -- source of comfort. First of all, we have a stabilization in the dispersion of lending rates. So this has been increasing, increasing, increasing. Now it seems that it’s stationary. It’s -- at least the values of this dispersion are not going up any longer.
The second thing is that the surveys, the Bank Lending Survey shows that there is a less increased in tightening -- in other words, banks in the stressed countries continue to tighten, but continue to tighten at the lower pace, at this lower pace.
And, third, which in a sense to me is probably the most important source of information, comes from the survey with the small- and medium-sized enterprises, where -- where you ask -- you ask them -- you ask them -- you how -- what’s the share of rejections of loan applications? And that’s gone down.
Second, you ask them, what sort of financial obstacles do you find in applying for a loan? Here there are three points, first of all, as I said, the rejections, but also if they are given an amount which is lower than they ask for. And, third, if they are asked for -- if the bank asked them for an interest rate that is so high that the SME has to say, “Thanks, but no thanks.”
And we see that the responses for -- for these so-called financial obstacles are for -- for some countries, they are -- some of the stressed countries, they are significantly -- significantly improving. And, by the way, in Germany, you notice an improvement on all accounts.
So you see some -- some -- for instance, on the availability of loans for the euro area, you see a smaller deterioration, by a significant amount, and then the same happens at country level, for Spain and Italy, and obviously for Germany, and so on. So from this survey data, you -- I wouldn’t get -- I wouldn’t get the conclusion that, again, we have no more fragmentation, but we are observing improvements.
The problem, of course, is that this -- as I said at the beginning, this credit contraction has -- has been lasting for a long time. And it’s been compounded by the short-term contractionary effects of fiscal policies. So it’s not going to be a one-day affair to unravel this. Thank you.
STAFF: Lucia Vioscova (ph), Slovak Radio? Please just give us a bit of time for the translation.
QUESTION: I will ask in English, if that’s OK.
QUESTION: OK. So I would like to follow up on the growth versus austerity question, because that’s quite -- the debate is quite vocal, also, in Slovakia. You’ve said that some of the austerity measures taken by countries, by member states were made in emergency and they were not the best measures. But would you say that possibly for the near future a compromise solution could be so as to prevent such similar emergency, that the countries that have already cut their deficit at least to this 3 percent GDP limit, which is the limit for the euro zone, that could slow down the consolidation so that it wouldn’t have to have 0.5 percent of GDP cut of deficit in the next year, but maybe a bit lower to possibly support the economic growth in these countries? Because that’s, for example, the argument -- the political argument in Slovakia. Thank you.
DRAGHI: Yeah. I -- I said -- I said at the beginning, the - - I used not -- well, first of all, the last word in this is not up to the ECB. Let’s never forget this.
I said that -- I used waringly (ph) the word “don’t unravel” the progresses that you have achieved. And if you -- if you -- if a country needs time, the tradeoff to having more time should not be a compromise on the ultimate objective set by the commission, but having structural reforms and revisiting the composition of the fiscal adjustment and having a medium-term framework which is strong and credible. Thank you.
STAFF: Adia Eitenmalect (ph) from Agence France-Presse, please.
QUESTION: Thank you. Many members of the ECB have said that rate cut would be of little effect in the current situation, with the lack of --
DRAGHI: I’m sorry. Can you repeat your question?
QUESTION: Doesn’t work here?
QUESTION: Oh, OK, sorry. Many members of the ECB have said that a rate cut in the current situation would be of little effect, especially regarding the lack of (inaudible) transmission (ph) of the policy (ph) (inaudible) policy, so why a rate cut now? And have you discussed more precisely what measures in order to re-establish -- re-establish this monetary -- this transmission of your monetary policy?
DRAGHI: Thank you. We -- I mean, as I said before, the -- the -- some encouraging signs in the receding fragmentation led us to take this decision. And the fact that -- let’s not forget, the other fact is that the weakness is now spreading to countries where the issue of transmission or lack of it was never there, in other words, where we know that monetary policy -- standard monetary policy measures are effective. I think these are the two predominant considerations.
Why is -- why is credit subdued? There are -- as always, there are demand reasons and supply. The demand reasons are that the economy is, indeed, weak, and it’s weak in its domestic components, consumption and especially fixed investment. The -- also, there is -- also, this comes out of the -- of the Bank Lending Survey and also from the SME survey. The dominant factor in the demand -- explaining the demand, the low demand of credit -- for credit, is the uncertainty, the macroeconomic uncertainty. And this goes together with risk aversion, which is -- which actually plays both -- both sides, both demand and supply.
There is also -- but this is limited to some countries. There’s also an issue of deleveraging. The deleveraging process is not something that only banks may have to do in some places, but it’s also something that the clients, bank clients may have to do. Some corporations, some SMEs, some households have to delever. This is not a euro area problem, but it’s certainly the problem of some stressed countries. And this, too, explains low demand.
On the supply side, you have risk aversion predominantly. At this point in time, but we certainly -- as I said, we look at all the income data -- but at this point in time, we can’t say that funding worries are a dominant factor in restricting credit supply. We don’t see that.
But we have to project this for the coming months. And it’s certainly true that we will have a gain and hump (ph) in bond maturities, in bank bond maturities within the next 15 months.
So -- but it’s predominantly risk aversion that makes supply tight. It’s the -- it’s a fact that in some cases the -- for many banks that have not -- didn’t have any toxic assets at the beginning of the crisis, were not especially weak at the beginning of the crisis, have become weaker because of the rising share of nonperforming loans.
You know, recessions have this feature of being, in a sense, like a spiral. And so these banks -- some of these -- some of these -- fortunately, these are not euro area problems. These are limited problems. But some of these banks will have to strengthen their capital position in order to get back to lend.
STAFF: Suzanne Lynch, please, the Irish Times.
QUESTION: Yeah, Suzanne Lynch from the Irish Times. Just two questions. Firstly, is there any update on when the Irish promissory note deal will be reviewed by the ECB? And, secondly, just in terms of bank recapitalization, I’m just wondering how big of a factor our -- is the banking -- worried about the banking sector in peripheral countries? The Irish Central Bank governor said this week that Irish banks would need more capital. And do you think that a stress test is required before Ireland exits the bailout at the end of this year? There’s some talk in Ireland that perhaps it should be put back until next year, of part of the EBA stress tests.
DRAGHI: I think, for me, it’s -- it’s really -- on the first question, there’s no change, as it’s before. And the second question, it’s too early to respond to this question. Something that’s been discussed and pros and cons, there are views that are different. We are -- it’s sort of -- it’s in that stage where we -- we’re really putting together our views there and see what’s best for -- for Ireland. Thank you.
STAFF: The last question will go to Geoff Cutmore from CNBC, please.
QUESTION: Thank you. Geoff Cutmore, CNBC. I don’t know whether the Governing Council were aware, but while they were meeting, the pope was tweeting his unhappiness about the unemployment situation and expressing some frustration that people appear to be profiting at this time from rises in financial markets, even as unemployment hits new record highs.
So I have a two-pronged question. One is, firstly, are you frustrated with the perception that the ECB seems to be supporting financial markets, but not doing much to help the real economy in the euro zone?
And the second point to that would be, I sensed when I heard you talking at the beginning of this press conference a little bit of frustration about the way banks are not taking more risk onto their own balance sheet. Is it not time that the ECB took that risk onto its own balance sheet and expanded its balance sheet, the rules notwithstanding at this stage?
DRAGHI: Thank you. Well, the -- we are -- I wouldn’t use the word -- well, yeah, I would use the word frustrated, yes, certainly. We -- we view improvements in the financial markets - - we think financial markets are the only and the necessary channel through which monetary policy is transmitted. You don’t go around with helicopter money, throwing money. I mean, just -- you have to go -- and in Europe, you go through banks. You don’t have capital markets, as I said, in the -- as you have in the United States. And so we have to go via the banking system.
And so that’s why, in my press conference, I tried to give you a very detailed reading of different indicators, because it shows how closely we’re trying to examine and analyze reality to see whether these impulses that we’ve been transmitting to the economy since now a long time get translated into better wealth or better lower unemployment, better economic activity. So no doubt about that.
On the second point of your question, would the ECB take risks on its balance sheet? Well, I’ve gone through this a moment ago, really, and I’ve shown you -- I think I’ve shown you how more difficult is this problem in Europe, in -- in Europe, I’d say, than it is in the United States. And so I think in judging the central bank, one should be aware of what is its mandate, what it can do, and what is the institutional set-up surrounding the action of the central bank.
And institutional set-up is basically made by two things -- first of all, the government’s action and, second, the financial structure in which the central bank finds itself to -- to act. Thank you.
STAFF: Thank you. We’ll close the press conference for today. We’ll just take a five-minute break, and then we’ll be back for the ceremony of the new five-euro notes, just in this room again. You can just go out for five minutes. Thank you.
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