Modest Mario

The euro crisis

  by J.O. | LONDON

GREECE was the word on everyone’s mind as Mario Draghi, president of the European Central Bank (ECB), sat down to his regular monthly press conference on February 9th. Mr Draghi was quick to say he had only just taken a telephone call from Lucas Papademos, Greece’s interim prime minister, who confirmed that an agreement had been struck on a new bail-out package for his beleaguered country. The ECB (though not a party to negotiations) had also picked up “vibrations” that suggested Greece was close to a deal with its private-sector creditors, too. Further details are likely to emerge after a meeting of the euro-zone finance ministers later today.


Yet what kind of role the ECB will play in the new deal remained unclear. The central bank has bought around €40 billion-worth of Greek bonds (with a face value of perhaps €55 billion) as part of its efforts since May 2010 to stabilise the euro zone’s sovereign-bond markets. One hope in Athens is that the ECB might forgo the profits it would make if the bonds were held to maturity (and if they were paid off in full) to help Greece stabilise its public debt. Mr Draghi was non-committal: “The only thing I can say today is that we cannot say anything,” he said helpfully. He did say that the ECB would not be prepared to lose money on its bond purchases. That would amount to the monetary financing of governments, which is forbidden.
The focus on events in Greece meant there was a bit less attention on the ECB’s main business of monetary policy. The bank decided to keep its main interest rate at 1% at the monetary-policy meeting that finished an hour of so before Mr Draghi spoke. Earlier in the day, the Bank of England had, as widely expected, increased the target for its asset-purchase (or “quantitative easing”) programme by £50 billion, to £325 billion. A statement by the bank’s monetary-policy committee said additional bond purchases were needed to address the immediate weakness in the economy, which meant inflation would otherwise fall below its 2% target in the medium term.
The ECB is squeamish about the sort of quantitative easing the Bank of England has gone in for. Yet its monetary policy is liberal all the same. Mr Draghi said the three-year long-term refinancing operation (LTRO) scheduled for February 29th was likely to be as big as the first one in December, at which €489 billion of three-year loans were advanced to euro-zone banks. The ECB’s 23-strong governing council has only just set the terms by which banks can pledge “credit claims” (ie, unsecured bank loans) as collateral for ECB money, including at theupcoming LTRO. Mr Draghi reckons this will be especially helpful for banks that fund smaller companies, which find it tough to access credit. The Bank of England’s efforts to unblock bank lending in Britain now seem leaden-footed by comparison.
If the euro zone crisis now looks far less scary than it did three moths ago, it is thanks in large part to the ECB. But on the economy, Mr Draghi stuck to the cautious assessment he made in January: that the economy had stabilised at low levels. He would only venture that the IMF (which recently forecast a fall in euro zone GDP of 0.5% this year) is too pessimistic, especially about the German economy. And Mr Draghi believes (rather modestly) that a lot of the recent good news is down to the efforts by politicians. “The fiscal compact [agreed by euro zone leaders] is a major political event,” he declared. “It is a sign of commitment by all states, especially large ones, to the euro.” If the ECB cuts a deal on its bond holdings for Greece, might it do the same for Ireland and others, too? “Greece is unique for everything,” said Mr Draghi with a weary laugh. “We don’t want to repeat it.”