ECB to use 'all instruments' in case of Brexit impact
By Eric Maurice
European Central Bank (ECB) chief Mario Draghi said that eurozone recovery could be hit by Brexit and other geopolitical uncertainties, while suggesting that public money could be used to solve banks’ loan problems.
“The risks to the euro area growth outlook remain tilted to the downside,” he warned on Thursday (21 July) at his monthly press conference in Frankfurt following the ECB’s governing council meeting.
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He said that “the outcome of the UK referendum and other geopolitical uncertainties, subdued growth prospects in emerging markets, the necessary balance sheet adjustments in a number of sectors and a sluggish pace of implementation of structural reforms” could prevent Europe’s recovery.
“If warranted to achieve its objective, the governing council will act by using all the instruments available within its mandate,” he said.
He also warned that failure to resolve massive amounts of bad loans in European banks, especially in Italy, would diminish the impact of policies to pump money in the economy.
Commenting on Brexit, Draghi said that “financial markets and the banking sector have reacted in fairly resilient fashion”.
He added that estimates of Brexit's impact on the eurozone economy - between 0.2 and 0.5 percent less growth over the next three years - should be taken “with a certain grain of caution”.
He said that “uncertainties prevail” because the actual impact would depend on how long negotiations between the UK and the EU will take and what their outcome will be
The eurozone economy grew by 0.6 percent in this year’s first four months, compared to 0.4 percent in last year’s final quarter. Growth is expected to continue this year, although at a lower pace.
Draghi stressed that it was “essential that the bank lending channel continues to function well” in the eurozone.
He said that non-performing loans (NPLs) - bad loans that weigh on banks' results - were a “significant problem for future profitability and for the capacity and the ability the banks have for lending."
The problem is acute in Italy, where banks are faced with up to €360 billion of bad debts.
Draghi, a former governor of the Bank of Italy, said the Italian banks issue was “a big problem” that will take time to address.
He said the solution was to create a market to trade NPLs and that governments should pass legislation to foster its development.
He also suggested that public money could be used as a backstop “when in times of exceptional circumstances the NPL market is not well functioning” and to avoid fire sales.
He said the measure would be “useful” but should be agreed with the European Commission. He stopped short of saying a public backstop should be put in place to solve the Italian banking crisis. Eurozone politicians outside Italy have so far said this was not necessary.
Pressed to comment on the possibility that Spain and Portugal could be sanctioned by the EU for their excessive deficits, Draghi said the decision was “entirely in the hands of European Commission”.
The EU executive “has the responsibility, the power and the knowledge to take a decision,” he said.