Eurozone Situation “Very Serious”, says Draghi
January 18th, 2012
The President of the European Central Bank (ECB), Mario Draghi, has warned that the debt crisis in the eurozone is worsening and has called the situation “very serious”, but wanted to downplay the assessments of the credit rating agencies.
Diario Sur reported that in his first address to the Committee on Economic and Monetary Affairs as Chairman of the European Systemic Risk Council (ESRC), Draghi showed pessimism over the current economic conditions the eurozone is facing at the moment.
The crisis was described in October by his predecessor, Jean-Claude Trichet, as systemic, but since then Draghi said it has worsened. “The situation has deteriorated. We are in a very serious situation and we must not ignore this fact,” said Draghi, who has urged the eurozone to act quickly and with good coordination.
In order to counteract this trend, politicians have reacted and central banks have intervened decisively to ease monetary conditions and, in particular, to extend the possible guarantees and the period of liquidity operations. Meanwhile, he added, the Heads of State and Government of the eurozone have agreed to sign a treaty for a budget deal and better coordinate their economic policies. However, he said that “decisions without the corresponding actions are not sufficient and must be given the attention necessary to implement the measures in the right order.”
First, we must restore confidence in the sovereign debt and ensure that the EU firewalls are operational and equipped with an effective and flexible mandate. The commitments made by the leaders of the eurozone must be implemented rapidly and fully, especially in relation to the European Financial Stability Fund (EFSF) and the European Stability Mechanism (MEDE). Expanding the capabilities of the EFSF can facilitate the recapitalisation of banks in non-rescued countries, but only if the integral anti-crisis package is implemented in a reliable manner can they continue with other efforts, stressed Draghi.
Secondly, Draghi stated that the eurozone needs clarification about the robustness of the EU financial system. He stressed that the proposal from the European Banking Authority (EBA) to restore confidence in the strength of banks through recapitalisation should not be implemented at the expense of the adequate flow of loans to the real economy or exacerbate the weaker points of the market.
Draghi also highlighted the distrust of the rating agencies’ assessments. Seventy-two hours after Standard & Poor’s (S&P) dealt a blow to the credibility of the eurozone by downgrading nine member countries, Draghi said: “We have to learn to function without giving too much weight to their evaluations.” “Regulators, investors and banks have to be more independent of those assessments. That’s the attitude which the ECB has already been applying in recent years”.
Shortly before entering the Committee, Draghi received the news that S&P had also decided to downgrade the note of the European Financial Stability Fund – the temporary rescue instrument of the eurozone, from AAA to AA+. According to the ECB President, he said that “instead of complaining about the qualifications or devoting much time to them, they should be taken as just one more piece of information”.
With regard to the lowering of the EFSF, Draghi wanted to make it clear, however, that a reduction of the fund, based in Luxembourg, would have “consequences” which would be reflected in an increase in the cost of funding on the market. He said that this is why the countries of the eurozone which still enjoy the highest AAA credit rating by S&P – Germany, Luxembourg, Finland and Holland – “will have to increase their contributions” to the Fund, if they want to maintain the same capacity of intervention as before the reduction of the Fund.
The EFSF still has the highest note from the other two major agencies, Moody’s (Aaa) and Fitch (AAA). To maintain the same loan capacity with the same interest rates, “we need additional contributions from countries who still retain the triple A rating,” said Draghi, who also warned that the eurozone should not “forget that the consolidation budget must be accompanied by growth and job creation,” which is one of the main criticisms of S&P.
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