Tuesday

26th May 2020

ECB cheap loans no substitute for reforms, Draghi warns

  • Mario Draghi says the €1 trillion loans are giving some breathing space to banks and governments (Photo: World Economic Forum)

ECB chief Mario Draghi on Wednsday (4 April) said talk of an exit strategy from the one-trillion-euro cheap loans programme was "premature", but warned that this was no substitute for reforms.

Speaking at the monthly press conference in Frankfurt, the Italian banker defended the "non-standard" policy - criticised by some economists and the German central bank as a covert money-printing operation.

Read and decide

Join EUobserver today

Support quality EU news

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

Draghi said the so-called long-term refinancing operation (LTRO) injecting €1 trillion in eurozone's cash-strapped banks had averted a credit crunch and calmed markets.

"Any exit strategy talking for the time being is premature," he said, noting that any decision to wind down the programme - as the Bundesbank is calling for - would ultimately have to be endorsed by him.

But he insisted that governments should "take advantage of this window of opportunity and relative peace on the financial markets to undertake structural reforms".

Raising borrowing costs in Spain were a proof of "markets expecting reforms" rather than market 'volatility', Draghi said. "They (markets) are asking these governments to deliver on fiscal and structural reforms, and I don't mean Spain only," he added.

Interest rates on the 10-year Spanish government bonds leaped by 28 basis points to 5.7 percent on Wednesday during an auction in which Madrid was able to sell €2.6 billion worth of bonds. The yields are at their highest level since January.

The disappointing bond auction comes despite fresh austerity measures announced last week, with budget cuts amounting to €27.3 billion this year. But investors are still concerned that Madrid will not be able to meet its deficit targets, after it missed them last year and obtained laxer ones for this year after negotiations with the EU commission and member states.

"The main negative effect, the main risk for the Spanish economy, is the perception that public accounts are not sustainable," economy minister Luis de Guindos told Reuters.

He said this year's target of cutting down the deficit to 5.3 percent of GDP was "very important" but even more so for Spain in 2013 to reach the three-percent deficit ceiling allowed under EU rules - which would restore market confidence.

But while Spain is seeking to curb its government spending, employment rates are deteriorating steadily: over 50 percent of young Spaniards were out of a job in February and almost a quarter of the adult workforce, according to EU statistics published Monday.

Draghi admitted that all the "fiscal consolidation" measures are worsening the recession that has gripped the eurozone, but insisted that this was the only way to get back to "sustainable growth" in the longer term.

"Growth can come from foreign demand and low interest rates," the banker said as the ECB decided to keep its key interest rate unchanged at one percent.

Banks queue up for cheap ECB loans

Over 500 European banks rushed to borrow almost half a trillion euro in cheap loans from the ECB on Wednesday, highlighting the credit squeeze on the market. The cash injection only marginally increased investor confidence, however.

Sarkozy wants new role for euro bank

One week before elections, French incumbent Sarkozy has said the ECB should get a new mandate on economic growth - a no-go area for Germany.

Coronavirus

ECB promises (almost) whatever it takes

The eurozone's central bank has promised to buy up to €750bn of government and private bonds in new pandemic counter-measures.

Opinion

What does coronavirus 'Black Swan' mean for markets?

Falling demand and prices for oil and raw materials will revive the risk of deflation. The collapse in international trade and long-term rethinking of China's role as the major hub for the production of consumer goods and electronics is inevitable.

Stakeholders' Highlights

  1. European Sustainable Energy WeekThis year’s EU Sustainable Energy Week (EUSEW) will be held digitally!
  2. Nordic Council of MinistersNordic states are fighting to protect gender equality during corona crisis
  3. UNESDACircularity works, let’s all give it a chance
  4. Nordic Council of MinistersNordic ministers call for post-corona synergies between economic recovery and green transition
  5. Nordic Council of MinistersNordic co-operation on COVID-19
  6. Nordic Council of MinistersNordic research collaboration on pandemics

Latest News

  1. Recovery plans unveiled This WEEK
  2. EU and UK stumbling into Irish border crisis
  3. Malta patrol boat 'intimidates' capsized migrants
  4. How coronavirus might hit EU defence spending
  5. Herman Van Rompuy on power and influence in the EU
  6. EU links access to recovery fund to economic advice
  7. EU wants to halve use of pesticides by 2030
  8. Top editors alarmed by media cuts in EU and beyond

Join EUobserver

Support quality EU news

Join us