• Draghi: 'This money doesn't simply stay in our deposit facility, it circulates in the real economy (Photo: European Parliament)

EU central bank to issue more cheap loans

12.01.12 @ 17:39

  1. By Valentina Pop
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BRUSSELS - European Central Bank (ECB) chief Mario Draghi said on Thursday (12 January) after a monthly board meeting that he will keep up a "temporary" programme of cheap loans for EU banks because it has "prevented a more serious credit crunch."

The ECB also kept the interest rate at 1 percent following a decrease from 1.25 percent in November.

"The provision of liquidity will continue to support euro-area banks and thus economic recovery. Our non-standard measures had a substantial contribution to improving the financial situation of banks," Draghi said during a press conference in Frankfurt.

He defended the "non-standard" and "temporary" measure of issuing half-a-trillion-euro worth of loans at cheap interest rates in December, saying this has prevented a "more serious credit crunch" as maturing debt in the first three months of 2012 will put banks in need of some €200 billion.

"Additional measures announced in December should provide more support to the economy. All non-standard measures are temporary in nature," he said, in reference to another three-year loan auction for banks scheduled for February.

As for criticism that record sums are being parked at the ECB at levels almost equal the value of the December loans - signalling continued reluctance among banks to lend to each other - Draghi explained that they have mainly been from different banks than the ones who got the loans.

"This money doesn't simply stay in our deposit facility, it circulates in the real economy," the ECB chief said.

Meanwhile, the decision to keep the interest rate at one percent was based on "tentative signs of stabilisation." But Draghi warned that inflation is likely to stay above the two percent threshold required by the ECB and that economic growth will slow down more than predicted in the first months of 2012.

He refused to answer if the ECB envisages lowering the interest rate in future. But in his opening statement, Draghi uttered the exact same words as his predecessor one month before slashing the rate from 1.25 percent to one percent: "A very thorough analysis of all incoming data and developments over the period ahead is warranted."

'Unambiguous' treaty needed

Draghi highlighted the need to speed up work on the new inter-governmental treaty, inspired by his own "fiscal compact" put forward ahead of the December summit. "It would be highly welcomed if the fiscal compact was signed by the end of January rather than March as currently envisaged," he said.

As for the latest draft, which saw a series of measures watered down to accommodate demands from member states, Draghi said: "The wording of such rules needs to be unambiguous and effective."

Hungary and Greece also got their share of bashing, with Draghi repeating his "serious concerns" over the independence of the Hungarian central bank following the adoption of a new law allowing government control over the body.

Athens, he said, needs to "complete its structural reforms" - privatisations and slashing of government spending - rather than relying on member states to step up their contribution in a revised second Greek bail-out.

Commenting on the Draghi announcement, ING senior economist Carsten Brzeski told this website that the cheap loans program is "working, but is not the silver bullet."

He noted that although the ECB is unlikely to act as "lender of last resort" to euro countries any time soon, it is in an "ongoing process of improvisation" - by buying up Italian and Spanish bonds, issuing cheap loans to banks and soon by acting as an "agent" for the under-staffed bail-out fund for the eurozone, the European Financial Stability Facility (EFSF).

"The ECB will just carry out their market operations, as the EFSF is now also allowed to purchase bonds in the secondary market. The purchases will be made with EFSF money, but it's a matter of expertise, of facilities - they can't do it on their own because they are just 12 people in Luxembourg running the whole company," Brzeski said.

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