Draghi: Euro recovery losing momentum
Sep. 22, 2014
FRANKFURT, Germany (AP) — European Central Bank head Mario Draghi defended the bank's new stimulus programs as he warned that the weak economic recovery in the eurozone "is losing momentum."
Draghi told members of the European parliament Monday there was no sign yet of a halt to the sharp decline in economic indicators seen in August. The 18 countries that use the euro saw no economic growth at all in the second quarter — an alarming signal after only four quarters of weak growth.
"The economic recovery in the euro area is losing momentum," Draghi said during a regular testimony before the parliament's committee on economic and monetary affairs. He said risks for the economy were "to the downside."
The eurozone is slowly healing from troubles over high debt that began in 2009 and led to Greece, Ireland, Portugal, Cyprus and Spain needing bailout loans from other eurozone governments and the International Monetary Fund. Government spending cutbacks have held back growth and boosted unemployment, which is falling only slowly.
Draghi said the recovery was being threatened by geopolitical disturbances — which would include the conflict between Ukraine and Russia, although he did not mention the countries by name — and by failure of euro member governments to reform their economies and make them more efficient.
He defended the bank's most recent stimulus program, an offer of cheap, long-term loans to banks tied to their lending to companies. Banks took only 82.6 billion euros at the first offering Sept. 18, less than many market analysts had expected.
Draghi said the offering was "within the range of takeup values we had expected." He cautioned that the September loan offering, taken up by 255 banks, needed to be assessed together with the next one scheduled for December.
The amount of cheap credit a bank can get from the ECB under the program depends on how much it loans to companies. The September and December offerings will hand out money based on how much banks loaned to companies before April 30; the amount available in offerings after that will be based on lending practices going forward.
The ECB is preparing another stimulus program, in which it will buy bonds backed by bank loans to companies and home buyers — also an attempt to get credit flowing.
The ECB has said buying the bonds — called "asset-backed securities" because they are backed by assets such as loans that are being repaid — will stimulate the market for such bonds. The market fell off sharply after the more complex kinds of such securities were blamed for the sub-prime mortgage crisis in the United States.
Draghi said the purchases, slated to start in October, would have an added impact because the ABS market was "severely impaired." The idea is that lenders will bundle more such bonds if they know there is a ready buyer with unlimited cash, such as the ECB.
The ECB would limit its risk of losses by only buying the simpler and more highly rated versions of such bonds. It will buy lower-rated versions only if there is a government guarantee of repayment.
The ECB is trying to boost its balance sheet — one measure of its total stimulus efforts — by 1 trillion euros. It has not ruled out further stimulus — such as large-scale buying of government or corporate bonds, also called quantitative easing. Inflation is currently only an annual 0.4 percent, a sign of weakness and well below the bank's goal of just under 2 percent.