“Regulatory Competition and Subsidiarity
in Corporate Governance
in a Transatlantic Perspective”
12th July 2004, Bibliotheque Solvay, Brussels
|The ECGI is grateful for support for the Launch Conference from|
The European Commission
Goldman Sachs International
May 2, 2013, 10:14 a.m. EDT
ECB cuts rates as Draghi says more room to act
Draghi says monetary policy is “extraordinarily accommodative”
By Polya Lesova, MarketWatch
NEW YORK (MarketWatch) — The European Central Bank delivered on Thursday a widely expected cut in its benchmark interest rate, with its president saying monetary policy has been “extraordinarily accommodative” and the bank stands ready to act further if needed.
Following its meeting in Bratislava, Slovakia, the ECB’s governing council said it decided to lower its main refinancing rate by 25 basis points to 0.50%, meeting market expectations.
Markets tackle ECB rate cut
The European Central Bank cut it main interest rate by 0.25% to 0.5%. Also, U.S. markets will look to rebound from Wednesday’s selloff. Michael Casey has details.
The ECB also said it will “continue conducting the main refinancing operations as fixed-rate-tender procedures with full allotment for as long as necessary,” and at least until July 2014.
This measure represents “liquidity insurance for the banking system,” ECB President Mario Draghi said in a press conference following the governing council’s meeting. “This is a measure that benefits all kinds of banks.”
The combination of this liquidity measure and the cut in the benchmark interest rate is “especially important,” according to the ECB president.
At his press conference Thursday, Draghi also said that the ECB’s monetary policy has been “extraordinarily accommodative.”
The ECB head said there was “very strong prevailing consensus toward an interest-rate cut” at Thursday’s meeting, with prevailing consensus toward a cut of only 25 basis points. Asked whether the ECB may lower rates again in future, Draghi said: “We look at all incoming data and we will monitor them closely. And we stand ready to act if needed.”
The rate cut was widely expected after recent data showed a decline in euro-zone inflation and deterioration in some economic indicators such as purchasing managers’ indexes. Euro-zone annual inflation dropped to 1.2% in April from 1.7% in March. The ECB aims to keep inflation rates below, but close to, 2% over the medium term.
“Draghi clearly kept the door open to additional action,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
Draghi noted the “low underlying price pressure over the medium term,” adding that inflation expectations are “firmly anchored.”
“Weak economic sentiment has extended into spring of this year,” he said. “The cut in interest rates should contribute to support prospects for a recovery later in the year. Against this overall background, our monetary policy stance will remain accommodative for as long as needed.”
After the ECB decision was announced, the euro EURUSD -0.84% initially rose to an intraday high of $1.3217, according to FactSet data. However, during Draghi’s press conference, the euro turned sharply lower and recently trading at $1.3085.
Draghi “seemed more open to a cut in the deposit rate and it is this that drove the euro lower after trading choppily initially,” said BBH’s Chandler. The ECB’s deposit rate now stands at zero.
The ECB also said Thursday the interest rate on the marginal lending facility will be cut by 50 basis points to 1.00%.
“This is clearly an effort by the ECB to encourage banks to lend,” said Craig Erlam, market analyst at Alpari Ltd. “However, I don’t see this having any impact on the real economy as it doesn’t address the fact that banks don’t want to lend when the economy in stuck in recession and businesses don’t want to borrow when the outlook is so grim.”
Polya Lesova is MarketWatch’s New York deputy bureau chief. Follow her on Twitter @PolyaLesova.
|President of the European Central Bank|
1 November 2011
|Vice President||Vítor Constâncio|
|Preceded by||Jean-Claude Trichet|
|Governor of the Bank of Italy|
16 January 2006 – 31 October 2011
|Preceded by||Antonio Fazio|
|Succeeded by||Ignazio Visco|
|Chairman of the Financial Stability Board|
2 April 2009 – 4 November 2011
|Preceded by||Position established|
|Succeeded by||Mark Carney|
|Born||3 September 1947
|Alma mater||Sapienza University of Rome
Massachusetts Institute of Technology
Mario Draghi (Italian pronunciation: [ˈmaːrjo ˈdraːɡi]; born 3 September 1947) is an Italian banker and economist who succeeded Jean-Claude Trichet as the President of the European Central Bank on 1 November 2011. He was previously the governor of the Bank of Italy from January 2006 until October 2011. In 2012 Forbes nominated Draghi 8th most powerful man in the world.
He was born in Rome, where he studied at the Massimiliano Massimo Institute and graduated from La Sapienza University under the supervision of Federico Caffè. Then he earned a PhD in economics from the Massachusetts Institute of Technology in 1976 with his thesis titled Essays on economic theory and applications, under the supervision of Franco Modigliani and Robert Solow. He was full professor at the Cesare Alfieri Faculty of Political Science of the University of Florence from 1981 until 1994 and fellow of the Institute of Politics at the John F. Kennedy School of Government, Harvard University (2001).
From 1984 to 1990 he was the Italian Executive Director at the World Bank. In 1991, he became director general of the Italian Treasury, and held this office until 2001. During his time at the Treasury, he chaired the committee that revised Italian corporate and financial legislation and drafted the law that governs Italian financial markets. He is also a former board member of several banks and corporations (Eni, Istituto per la Ricostruzione Industriale, Banca Nazionale del Lavoro and IMI).
In his capacity as Bank of Italy governor, he was a member of the Governing and General Councils of the European Central Bank and a member of the Board of Directors of the Bank for International Settlements. He is also governor for Italy on the Boards of Governors of the International Bank for Reconstruction and Development and the Asian Development Bank.
In January 2006 Draghi was appointed Governor of the Bank of Italy, and in April 2006 he was elected Chairman of the Financial Stability Forum; this organization which became Financial Stability Board in April 2009 on behalf of the G20, bringing together representatives of governments, central banks and national supervisors institutions and financial markets, international financial institutions, international associations of regulatory authorities and supervision and committees of central bank experts. It aims to promote international financial stability, improve the functioning of markets and reduce systemic risk through information exchange and international cooperation between supervisors.
On August 5, 2011 he wrote, together with the immediate past governor of the ECB, Jean Claude Trichet, a letter to the Italian government to push for a series of economic measures that would soon be implemented in Italy.
Draghi was frequently mentioned as a potential successor to Jean-Claude Trichet, whose term as President of the European Central Bank ended in October 2011. Then, in January 2011, German weekly newspaper Die Zeit reported, with reference to high-ranking policy-makers in Germany and France, that it is “unlikely” that Draghi will be picked as Trichet’s successor. However, in February 2011 the situation became further complicated when the main German candidate, Axel Weber, was reported to be no longer seeking the job, reviving the chances of the other candidates. On 13 February 2011 Wolfgang Münchau, associate editor of the Financial Times, endorsed Draghi as the best candidate for the position. A few days later The Economist wrote that “the next president of the world’s second-most-important central bank should be Mario Draghi”. On 20 April 2011 The Wall Street Journal reported that “Wolfgang Schäuble, Germany’s finance minister, is open to Mr. Draghi for the post of ECB President”. A few days later the German newspaper Bild endorsed Draghi by defining him the “most German of all remaining candidates”. Contrary to previous reports about France’s position, on 25 April it was reported that President Nicolas Sarkozy saw Draghi as a full-fledged and an adequate candidate for the job.
On 17 May 2011 the Council of the European Union – sitting as Ecofin – adopted a recommendation on the nomination of Draghi as President of the ECB. He was approved by the European Parliament and the ECB itself and on 24 June 2011 his appointment was confirmed by the European leaders. Draghi began leading the Frankfurt-based institution when Trichet’s non-renewable eight-year term expired on 31 October 2011. Draghi’s term runs from 1 November 2011 to 31 October 2019. Though France long backed Draghi’s candidacy, the country held up the appointment toward the end, insisting that Lorenzo Bini Smaghi, an Italian official on the ECB’s six-member board, cede his post on the board to a French representative.
Concerns were also expressed during the candidacy about Draghi’s past employment at Goldman Sachs. Pascal Canfin (MEP) asserted Draghi was involved in swaps for European governments, particularly in Greece, trying to disguise their countries’ economic status. Draghi responded that the deals were “undertaken before my joining Goldman Sachs [and] I had nothing to do with them”, in the 2011 European Parliament nomination hearings.
In December, 2011, Draghi oversaw a €489 billion ($640 b.), three-year loan program from the ECB to European banks. The program was around the same size as the US Troubled Asset Relief Program (2008) though still much smaller than the overall US response including the Federal Reserve‘s asset purchases and other actions of that time. Draghi’s ECB also promptly “repealed the two foolish rate hikes made by his predecessor …Trichet [and] … stepped up the bond purchases from struggling euro-zone nations” to help with the debt crisis, commentator Steve Goldstein wrote in mid-January, 2012. At that time, “Draghi and all of his colleagues (the decision was unanimous) chose not to cut the price for private-sector loans [below the 1% achieved with the "repeal"], even when he forecasts inflation to fall below the targeted 2% later this year.” As such, Goldstein concluded, Draghi would leave more moves to national leaders Sarkozy and German Chancellor Angela Merkel and central banks, contrasting Draghi’s actions with those of the Fed’s Ben Bernanke.
In February 2012, Nobel prize laureate in economics Joseph Stiglitz argued that, on the issue of the impending Greek debt restructuring, the ECB’s insistence that it has to be “voluntary” (as opposed to a default decreed by the Greek authorities) was a gift to the financial institutions that sold credit default insurance on that debt; a position that is unfair to the other parties, and constitutes a moral hazard.
Late in February, 2012, a second, somewhat larger round of ECB loans to European banks was initiated under Draghi, called long term refinancing operation (LTRO). One commentator, Matthew Lynn, saw the ECB’s injection of funds, along with Quantitative easing from the US Fed and the Asset Purchase Facility at the Bank of England, as feeding increases in oil prices in 2011 and 2012.
Awards and honors
|Knight Grand Cross of the Order of Merit of the Italian Republic – awarded on 5 April 2000|
- 2009 honorary distinction in Statistics (University of Padua)
- 2010 honorary Master in Business administration (Vicenza, CUOA Foundation).
- Baker, Luke (24 June 2011). “EU leaders appoint Mario Draghi as new ECB president”. Uk.reuters.com. Retrieved 26 June 2011.
- “I compagni di classe del nuovo Governatore” (in Italian). corriere.it. Retrieved 5 September 2012.
- [dead link (2012-03-26) "Bank of Italy – Mario Draghi"] Check
|url=scheme (help). Bancaditalia.it. Retrieved 26 June 2011.
- “Germany gives green light to Draghi”. LifeinItaly.com. 11 May 2011. Retrieved 25 June 2011.
- Foley, Stephen (Friday 18 November 2011). “What price the new democracy? Goldman Sachs conquers Europe”. London: The Independent. Retrieved 18 November 2011.
- Kort, Katharina (29 September 2009). “Super-Mario für die EZB”. Handelsblatt
- “German paper says Draghi’s ECB chances diminishing”. Reuters. 19 January 2011.
- Kennedy, Simon; Neuger, James G. (19 January 2011). “Weber’s Withdrawal Throws Open ECB Race as European Debt Crisis Persists”. Bloomberg.
- “Draghi can lead the eurozone out of danger”. Financial Times. 13 February 2011.
- “The Italian’s Job”. The Economist. 17 February 2011.
- Blackstone, Brian (20 April 2011). “Italian Gains Support in Central Bank Race”. The Wall Street Journal.
- “So deutsch ist der neue EZB-Chef”. Bild. 29 April 2011.
- Fouquet, Helene (25 April 2011). “Draghi Said to Be Seen by Sarkozy as Trichet’s Successor”. Bloomberg.
- “Mario Draghi, bien parti pour prendre la présidence de la BCE”. Le Monde. 27 April 2011.
- “Draghi Appointed ECB Chief”, Wall Street Journal, 16 May 2011.
- “Mario Draghi appointed as head of European Central Bank”. BBC. 24 June 2011. Retrieved 24 June 2011.
- Galloni, Alessandra, and William Horobin (24 June 2011). “Draghi appointed ECB chief (intro-only without subscription)”. The Wall Street Journal.
- Watts, William L. (24 June 2011). “EU leaders confirm Draghi to head ECB”. MarketWatch.
- “EU appoints Draghi to ECB, Bini Smaghi to leave”. Reuters. 24 June 2011. Retrieved 24 June 2011.
- “Hearing of Mario Draghi nominated to take over the European Central Bank 14-06-2011″. Europa (web portal) (in (French)). Retrieved 26 June 2011.[dead link]
- “EuroparlTV video: Interview: ‘Mario Draghi didn’t convince me’ – Pascal Canfin, MEP”. Europa (web portal). 15 June 2011. Retrieved 26 June 2011.
- Goldstein, Steve, “Unlike Bernanke, Draghi doesn’t aim to be hero”, MarketWatch opinion, January 12, 2012 11:06 am EST. Retrieved 2012-01-12.
- Stiglitz, Joseph (February 2012). “Capturing the ECB”. project-syndicate.org. Project Syndicate. Retrieved February 2012. “In fact, the ECB may be putting the interests of the few banks that have written credit-default swaps before those of Greece, Europe’s taxpayers, and creditors who acted prudently and bought insurance.”
- Lynn, Matthew, “What central banks provide, oil markets take away”, MarketWatch, February 29, 2012. Retrieved 2012-02-29.
- Draghi, Prof. Mario, “Cavaliere di Gran Croce …”, Presidenza della Repubblica webpage.
- Laurea honoris causa al prof. Mario Draghi
- I Master cuoa honoris causa
|Wikimedia Commons has media related to: Mario Draghi|
|Governor of the Bank of Italy
|Chairman of the Financial Stability Board
|President of the European Central Bank
Mario Draghi urges no let-up in austerity reforms after eurozone rate cut – as it happened
Live• Draghi: governments must not let progress ‘unravel’
• Rate cut not unanimous
• Draghi doesn’t rule out negative deposit rates for banks
• ECB press conference highlights from 1.30pm
• ECB cuts borrowing costs from 0.75% to 0.5%
That’s all for today, as Mario Draghi and crew head back to Frankfurt after a lively, and significant, meeting in Bratislava.
As my colleague Heather Stewart writes:
The European Central Bank has delivered an emergency quarter-point cut in interest rates but its president Mario Draghi cautioned governments in the recession-hit eurozone against “unravelling” their austerity policies .
The ECB’s governing council announced the first cut in borrowing costs since July 2012, reducing interest rates to a record low of 0.5%.The bank’s policy meeting in Bratislava made its decision against a backdrop of weak economic data including unemployment across the 17 member countries of the single currency hitting a record high of more than 12%
The euro fell more than 1% against the dollar to $1.304 in the wake of Draghi’s comments. The ECB president also suggested that the ECB would consider imposing a negative interest rate on deposits held at the central bank, to prevent banks parking money at the ECB instead of lending it out to firms. The ECB’s deposit rate already stands at zero.
Explaining the bank’s decision to cut rates in his regular press conference, Draghi pointed out that GDP across the eurozone has now declined for five consecutive quarters, and, “weak economic sentiment has extended into spring of this year”.
However, Draghi urged policymakers to keep faith with austerity amid a fierce debate in Europe about whether crisis-hit countries should be allowed to ease up on their drastic deficit-reduction plans.
“In order to bring debt ratios back on a downward path, euro area countries should not unravel their efforts to reduce government budget deficits and continue, where needed, to take legislative action or otherwise promptly implement structural reforms, in such a way as to mutually reinforce fiscal sustainability and economic growth potential,” he said.
And you can follow full highlights of the press conference from 1.30pm
In other news…
• The Italian prime minister, Enrico Letta, has called for more action on youth unemployment (see 12pm)
• Eurozone manufacturing output has fallen again, driven by a drop in production in Germany (see 9.31am)..
• But Germany’s slump has slowed (see 9.45am).
• And in Germany, the Neo-Nazi Golden Dawn party was blocked from using Syntagma Square for its ‘Greeks only’ food handouts (see 10.27am).
I’ll be back tomorrow for another day of rolling eurozone developments, and the excitement of the monthly US jobs data. Until then, thank you and goodnight!
In the markets
European sovereign bonds have rallied pretty strongly today, pushing down bond yields deeper into ‘safe haven’ territory.
Here’s a selection of 10-year bond yields:
• Germany: 1.16%
• France: 1.65%
• UK: 1.62%
• Italy: 3.76%
• Spain 4.03%
• Greece: 10.2% (having dipped below 10% earlier)
I wonder if these low bond yields were on Mario Draghi’s mind earlier today, when he urged eurozone governments not to abandon their fiscal plans. Will such low borrowing costs embolden leaders in Italy and Madrid to push back harder against Brussels this summer?
Europe’s stock markets finished the day in mixed mood, although there’s a decent little rally on Wall Street this afternoon.
• FTSE 100: up 9 points at 6460, + 0.15%
• German DAX: up 48 points at 7961, + 0.6%
• French CAC: up 2 points at 3858, + 0.05%
• Spanish IBEX: down 12 points at 8406, -0.15%
• Italian FTSE MIB: down 19 points at 16748, – 0.12%
And on Wall Street, the Dow Jones is currently up 111 points at 14812, +0.78%, after General Motors and other big companies announced higher profits.
Forgot to mention this earlier, but the ECB announced this afternoon that it is prepared to accept Cyprus’s sovereign debt as collateral in its refinancing operations (the statement is here).
Michael Hewson: negative rate talk hit euro
Here’s Michael Hewson of CMC Markets on the ECB rate decision, and press conference:
The admission that the governing council was keeping an open mind on negative deposit rates, in spite of the risks, was not expected… and precipitated a sharp sell-off in the euro currency, and a little bit of choppiness in equity markets.
Any expectation of some non-standard measures to help kick start lending to small businesses was left disappointed with only a nod to a continued discussion about any conclusions as to how to help SME lending.
While Draghi expressed his concerns about the weak economic outlook, he was keen to impress on other EU countries that they should continue to press on with the currently agreed reform programs in remarks clearly aimed at the governments in France and Italy.
Greek bonds have rallied – and here’s why
Greek bonds have risen in value today to the point where its 10-year bond yields dipped below the 10% mark this afternoon.
Quite a recovery – given these bonds were trading at yields around 30% last June, even after Greece wrote of a substantial chunk of its debts (the vertical line last March):
The recovery reflects the perception that Greece is no longer at risk of plunging out of the eurozone anytime soon (the chatter these days is about Cyprus, Italy or even Germany quitting – for one reason or another).
And some analysts do see encouraging signs in the Greek economy. The economy is still contracting, but after five years of recession there is hope that GDP will start growing in 2014. At some point, the theory goes, the fiscal rebalancing (with its painful wage and benefit reductions and tough cuts to government spending) must translate into a more competitive economy. Even within the single currency.
As covered at 9.45am, the slump in Greece’s factory sector slowed down last month. And yesterday, it began its privatisation programme by selling a €652m stake in a betting firm. That’s not as much as Athens had hoped – but it’s a start…..
Mario Draghi has been signing the new €5 note for a group of young people, all born since the euro was created, while the European anthem rang out.
Draghi was in ebullient mood, calling euro notes:
…the most visible and tangible symbol of European integration, used from one end of the continent to the other.
Just don’t try taking too many out of Cyprus at once.
The children who are here today are growing up in a continent of peace. They belong to the “euro generation” – they have only known one currency.
And the Telegraph’s Bruno Waterfield kindly provides a photo:
As promised earlier – here’s a link to the statement from Mario Draghi this afternoon.
Mario Draghi’s suggestion that the ECB could charge banks who want to leave money with it has sent traders dashing into French and Belgian government bonds:
Tweet of the week
The ECB is now showing off its new €5 notes… but Charles Forelle of the WSJ would rather hear Draghi answer a question on Cyprus’s capital controls:
Press conference ends
The press conference is over with NO mention of the situation in Cyprus — no questions about the fiasco of its original bailout, or the ongoing capital controls, unprecedented in the (short) history of the eurozone.
Draghi: we’re frustrated about unemployment too
The final question harks back to Pope Francis’s tweet about how unemployment is caused by a “self-centred mindset bent on profit at any cost” (see 12.16pm). Is the ECB frustrated that joblessness in the eurozone is at record highs?
“We are frustrated, yes”, says Mario Draghi, who explains that the ECB has to work its powers through the financial system
We can’t just throw money out of helicoptors. We have to go via the banking system.
The traditional question from Ireland, on whether there’s any progress on its push to restructure its promissary notes, is met with the traditional answer – no.
Draghi: We have not fallen out with Germany
Draghi denies that the ECB and Germany have clashed, following Angela Merkel’s recent comments that eurozone interest rates would be rather higher if they were aimed at the German economy.
ECB independence is dear to all, and especially, I would say, to German citizens
The ECB president points out that every member of the eurozone has its own business cycle:
They are not synchronous and they differ very much across the euro area. So the monetary policy measures which can benefit in some may not benefit in others.
One of the challenges of running a single currency….
Draghi gives a bit more details on how the ECB will help small firms get credit — another of the decisions taken today.
Dubbed the ABS programme, the ECB’s governing council has:
“decided to start consultations with other European institutions on initiatives to promote a functioning market for asset-backed securities collateralised by loans to non-financial corporations.
But, but… didn’t the practice of bundling loans into new securities that were then sold on to other banks actually help to cause the crisis, asks one journalist?
Draghi denies that the ECB would be encouraging banks to make dodgy loans. Instead, he suggests that lending conditions are actually improving, as the rejection rate for small firms seeking loans is dropping.
50 basis-point cut was on the table
Economist Frederik Ducrozet sums up Draghi’s comments about whether there was unanimous support for today’s decisions:
That’s another reason the euro has fallen, of course.
The euro took a dive against the US dollar following Mario Draghi’s comments about the possibility of negative eurozone interest rates for commercial banks (see 2.15pm).
It has dropped more than a cent to as low as $1.308.
Draghi doesn’t rule out negative interest rates
Crumbs – Mario Draghi suggests that Europe could implement negative interest rates. Not for the man in the street, but for banks who want to lodge money with it.
The ECB’s deposit facility rate was left at 0.0% today. But asked whether it could be cut further, Draghi says that the ECB has an “open mind”. It would have unintended consequences, he says, but nothing that the ECB couldn’t deal with.
(there’s a great blog post on negative interest rates here, by Frances Coppola – The strange world of negative interest rates).
Draghi has given a strong hint that today’s decision to cut interest rates was not unanimous.
He tells the press conference that:
There was a very strong pervading consensus towards an interest rate cut, within that the consensus was towards a 25-bais point cut.
Draghi: On growth vs austerity
Michael Steen of the Financial Times asks Draghi whether today’s decision is “too little too late”, given the weak state of the eurozone economy,
Draghi denies the charge, claiming that the ECB has been “extraordinarily accomodative”. He points to rising stock markets and falling bond yields as signs that the ECB has been making decent progress.
Steen also asks Draghi to elaborate on his comments about how governments should not “unravel” their progress on deficit reduction (see 1.48pm). Is this his contribution to the growth-vs-austerity debate?
Draghi responds by reminding us of how the crisis began — with governments with deficit/GDP ratios which were too high, which meant they were losing the confidnce fo the financial markets.
We tackled those tail risks, Draghi insists (pointing to his OMT programme which could be used to buy peripheral government debt if needed). We are only “left with the memory” of those days of dangerous bond yields.
And there is no question that fiscal consolidation is contractionary in the short term, Draghi says. “Taxes were already too high in some countries”, so obviously raising them higher would hit demand.
And countries need credibility, he continues — so they should not abandon the progress they have made in reducing their deficits and making structural reforms.
In Summary: Draghi is arguing that countries cannot simply abandon their plans for deficit reduction and embark on a borrowing spree to fuel growth.
Onto the Q&A — and the honour of the first question goes to a local journalist, who asks if Mario Draghi could imagine rates being cut below their new record low.
Draghi doesn’t give a terribly straight answer in English – but explains that the ECB is watching the data, and “stands ready to act” if needed.
He also points to the ECB’s decision to maintain its refinancing operations until July 2014 — we shouldn’t underestimate the importance of this commitment, he claims.
Draghi: don’t unravel progress on government borrowing
Draghi’s final prepared remarks focus on government deficits — he says it is crucial that eurozone governments do not “unravel” the progress made in reducing their borrowing needs.
That sounds like an intervention into the ongoing austerity-vs-growth row.
Draghi is arguing that governments must focus on structural reforms, to ensure long-term growth.
Draghi is rattling through the ECB’s official statement – it’ll be online in a few minutes.
The section on economic outlook is worth flagging up now:
Overall labour market conditions remain weak … weak economic sentiment has extended into the string of this year … euro area export growth should benefit from a recovcery in global demand … the improvements in financial markets since last summer should work their way through to the real economy… euro are economic activity should stabilise and recover gradually in the second half of the year. The risks … continued to be on the downside.
(grabbed from Reuters)
As expected, Draghi also reminds governments that they need to take advantage of the current stable markets and make structural reforms (this is one of his favourite themes)
Thirdly, the ECB has decided to begin discussions on how more support can be given to smaller firms through collateralising SME loans
(hopefully we should get more details on this in the Q&A)
The ECB is closely monitoring money market conditions, Draghi says, and has decided to continue its “main refinancing operations” until at least July 2014.
Draghi says that today’s interest rate cut should help the eurozone economy recover “later in the year”.
Draghi begins by pointing to the weakness of the eurozone economy.
He says that the monetary and loan environment remains subdued, and that weak economic sentiment has extended into the spring.
Monetary policy will be accomodative for as long as needed, he add.
The ECB press conference begins with Mario Draghi telling reporters that a number of decisions have been taken, including new decision on credit availability.
He also revealed that European Commissioner Olli Rehn attended today’s meeting,
Watch the ECB press conference
You can watch the ECB press conference on this webcast (although it’s a little slow to load right now).
It’s also been transmitted live on Bloomberg TV.
Alice Ross, the FT’s currency correspondent, points out that Draghi’s views on inflation will be interesting:
The consumer prices index fell sharply to 1.2% last month, from 1.7%. In the ECB’s world, price stability means an inflation rate close to, but below, 2%.
Alice has also summarised the immediate reaction to the rate cut over on the FT’s site (registration required).
David Brown, of New View Economics, suggests today’s rate cut is more symbolic than of real practical help:
The ECB rate cut is no surprise as it was well flagged by Draghi at last month’s meeting. Is it enough? No. The marginal effect of the cut is very limited, but at least it should have some symbolic rallying effect on economic confidence.
My colleague Heather Stewart writes:
Mario Draghi, president of the European Central Bank, has delivered an emergency quarter-point cut in interest rates in a bid to kickstart the recession-hit eurozone economy.
After holding its policy meeting in Bratislava on Thursday, the ECB’s governing council announced that it would reduce interest rates by a quarter-point, to 0.5%. It is the first cut since July 2012, shortly before Draghi promised to do “whatever it takes” to save the single currency and calmed markets in what became known as the “Draghi put”.
Heather’s full news story is here: Eurozone interest rates cut to 0.5%
Howard Archer of IHS Global Insight agrees that the ECB’s big challenge now is to get credit flowing to small firms in the eurozone:
It seems unlikely that the ECB will take interest rates any lower than 0.50%, so attention is likely to increasingly focus on how the ECB can help facilitate getting more credit through to smaller and medium-sized companies in countries where they are finding it hard to get bank credit.
Lorcan Roche Kelly, Trend Macrolytics’s chief Europe strategist, makes a very good point (as usual):
Cutting the European Central Bank’s marginal lending facility rate*from 1.5% to 1% could reduce the cost of taking emergency liquidity assistance from the ECB.
* – what the ECB charges banks to borrow from it
What will Draghi say?
Now attention turns to the ECB’s press conference in Bratislava in 30 minutes time.
Sony Kapoor of the Redefine thinktank hopes president Mario Draghi will announce extra stimulus measures (such as the extra borrowing help for small firms explained at 11.22am)
Draghi, though, is also fond of reminding politicians that monetary policy can only do so much:
The ECB rate cut was generally expected (and well-flagged), as you’ll know if you’re been reading the blog this morning.
With eurozone inflation falling to 1.2%, well below the target of just under 2%, the governing council had every reason to cut rates to stimulate demand in the face of a pretty rubbish economic outlook.
There’s no dramatic reaction in the financial markets. After an early wobble, the euro has actually risen slightly to $1.32.
As well as cutting its main refinancing rate from 0.75% to 0.5%, the ECB voted to leave its deposit rate (what it charged banks to leave cash with it) at 0.0%.
The marginal lending facility (what it costs banks to borrow from the ECB) is also cut to 1%, down from 1.5%.
The European Central Bank has voted to cut interest rates by 0.25% to 0.5%.
More to follow!
Just five minutes to go until the ECB announces its monetary policy decisions, following today’s meeting in Bratislava.
The financial markets are pretty calm — the euro is down 0.18 cents at $1.316. And the FTSE 100 is down 10 points at 6441.
City pundits and analysts are speculating about what the ECB might announce this afternoon.
Here’s a couple of sensible suggestions:
And a couple of more frivolous ideas for what the ECB might call a new scheme to help small firms:
The Pope tweets:
Yesterday Pope Francis spoke about the unemployment crisis during his weekly address in St Peter’s Square (more details here).
Letta: Youth unemployment crisis must be tackled
Italy’s new prime minister, Enrico Letta, rounded off his mini-tour of Europe this morning by calling for new measures to address eurozone youth unemployment.
On a visit to Brussels, Letta said politicians and officials need to make progress on the issue at next month’s EU summit:
We would ask above all that the fight against youth unemployment should be the most important, most concrete message to come out of the June European Council.
The eurozone youth jobless rate hit a new record high of 24% last month, fuelling fears about a lost generation and social unrest.
What might the ECB do?
The ECB’s governing council faces a tricky dilemma today. There are plenty of reasons to ease monetary policy (this morning’s weak manufacturing data is just the latest), which is why a rate cut is pencilled in.
But that alone will not a) cheer the markets, and b) (more importantly) provide much of a stimulatory boost to the eurozone.
Firms who are struggling to stay afloat in Italy or Spain, for example, are not suddenly going to take out expansionary loans on the back of a quarter-point rate cut. And banks with unrecognised bad debts in the vault aren’t going to suddenly stop hoarding capital either.
As Carsten Brzeski, senior economist at ING, puts it:
Data released since the April rate-setting meeting have provided further evidence that more monetary action could be needed in the euro zone…
But as long as the transmission mechanism is not working, a rate cut could simply go up in smoke.
Which is why several City anaysts believe Draghi may announce new measures to help small firms who do want to borrow.
Other options in the toolkit include full-blown quantitative easing (don’t get your hopes up) or ‘verbal’ intervention — basically Draghi telling us all how long he thinks rates might stay at current levels.
It is worth remembering that Draghi has already stabilised the eurozone and dragged down peripheral bond yields in his tenure as ECB president. That recovery, though, has still not made its way to the streets, homes and offices of the euro area,
Kit Juckes of Société Générale sums it up (typically) well:
The bottom line on the ECB today is that the real world is a different place from the fantasy world of markets. And the ECB has done a far, far better job of curing the market world than the real one.
That is to say, we have a steady currency, tight spreads, low yields, and equity markets that are up on the year. Now, Mario, you need to tackle the real world’s woes of recession, impending deflation, and catastrophic unemployment. And that is far, far harder…
Re-Define’s Sony Kapoor agrees that a rate cut is not enough:
While Marc Ostwald of Monument Securities reckons the ECB will leave rates unchanged, as it hasn’t finished preparing the unconventional measures it wants to deploy alongside it:
The rationale is simple…a rate cut will do nothing to help the distressed peripheral economies (or indeed Germany), given the monetary transmission mechanism remains severely impaired…as such the ECB needs to find some further ‘unconventional measures’ to try and enhance the efficacy of a refi rate cut, and comments from various ECB officials (above all Constancio and Asmussen) last week made it clear that the process of coming up with such measures is by no means complete.
France has sold €4bn of 10-year debt at a record low yield of 1.81%, as the bond market bubble continues to drive borrowing costs lower.
Traders bid for twice as much debt as Paris had on offer – which helped to drive down the bond’s interest rate to its all-time low.
The French economy may be struggling, but that isn’t deterring investors who are hungry for yield (especially as Central Banks maintain such loose monetary policy).
Clampdown on Golden Dawn’s food handouts in Athens
Away from economic data….the mayor of Athens has declared a victory for democracy after banning the neo-Nazi Golden Dawn party from handing out free food in Syntagma Square.
Golden Dawn was barred from using Syntagma for its regular food handouts to the needy today. Mayor Giorgos Kaminis took the decision amid growing alarm over its “Greeks only” policy – in line with its virulent anti-immigrant views.
Kaminis told Skai TV.
Syntagma Square will never be used again by anyone to hand out goods,
This square belongs to the city’s residents. Only the municipality can decide how it is used.
Greece’s Kathimerini reports that riot police blocked Golden Dawn from accessing Syntagma this morning. Instead, the party apparently distributed its food at its own headquarters.
Golden Dawn’s food handouts have helped to build the party’s popularity among Greeks suffering through its lengthening recession.
It is vowing to continue the food handouts: As Helena Smith wrote last night:
Pledging to defy a ban by the capital’s mayor, the extremists said they would go ahead with the handout of traditional Orthodox Easter fare, including lamb and eggs, to Greeks afflicted by draconian austerity.
“It is food that is aimed for the thousands of Greek families blighted by the genocidal policies of the memorandum,” said the party, referring to the loan agreement Athens has signed with international creditors to keep the debt-crippled country afloat.
The neo-fascist organisation said the event was aimed solely at those Greeks who could not afford to enjoy Easter because of budget cuts and record levels of unemployment.
“Priority will be given to families with three or more children,” it said in a statement. “We remind the mayor that in Greece we still have a democracy.”
Heartening news from Britain’s construction sector: it clawed its way back towards growth in April, with a monthly PMI of 49.4 (up from 47.2). Construction has been dragging UK GDP down in recent months — at this rate, it might actually help the UK grow this quarter….
Greek manufacturing slump is slowing
Amid the gloom of Europe’s strinking manufacturing base, Greece’s factory sector actually posted its best monthly data in 21 months.
At 45, Greece’s manufacturing PMI still showed a contraction, but it’s a significantly better result than March’s 42.1. Markits report showed a smaller fall in new orders than previously, and a slowdown in the rate at which firms cut jobs.
Greece won’t have turned the corner until new orders start to rise and firms begin rehiring. Markit warned that the sector will still drag on the Greek economy for several months. But it could be a glimmer of hope….
German manufacturing output stumbles…
Europe’s economic downturn has worsened, with manufacturing output sliding to a four-month low in April.
The decline was mainly due to shrinking activity in Germany. But while Europe’s biggest economy had a worryingly weak month, there were encouraging signs in Greece (more to follow).
Markit’s final manufacturing PMI survey for the eurozone came in at 46.7, which is a slightly more painful contraction than March’s 46.8.
Here are the key numbers:
Germany: 48.1, down from March’s 49 [anything below 50=shrinking output]
France: 44.4, up from March’s 44.0
Italy: 45.5, up from 44.5
Spain: 44.7, up from 44.2
Greece: 45.0, up from 42.1
OECD takes red pen to Italian forecasts
The OECD has given Italian prime minister Enrico Letta a reminder of the challenge he faces, by slashing its economic projections for Italy.
It cut its forecast for Italy 2013 GDP to -1.5% from 1.0% (in line with the IMF’s latest projection).
The OECD also hiked Italy 2013 Debt/GDP Forecast To 131.5% from 130.4%, and its 2014 prediction to 134.2% From 132.2%.
Reminder: Greece’s austerity package is designed to drag its debt/GDP ratio down to 120% by 2020 — seen by the IMF as a key measure of debt sustainability.
Spanish manufacturing output slides again
Spain’s manufacturing sector has now been shrinking for two years, according to a new survey showing the Spanish downturn continued last month.
Markit’s monthly manufacturing PMI (a measure of activity across the sector) came in at 44.7; slightly better than March’s 44.2, but still showing a steep decline.
Markit’s Andrew Harker warned that there was “nothing in the survey” to suggest an end to the slump.
Another signal to the ECB that economic activity in the periphery is shrinking.
Guy Johnson, Bloomberg’s man in Bratislava, reports that president Draghi has been whisked in for the meeting:
The euro has dropped a little this morning, as a rate cut looks increasingly likely (but not everyone believes the ECB governing council will do it) – currently down 0.2% at $1.315.
Many European traders are catching up after yesterday’s May Day holiday:
All eyes on the European Central Bank
Good morning, and welcome to our rolling coverage of the latest events in the eurozone financial crisis and across the world economy.
Mario Draghi, president of the European Central Bank, takes centre-stage again today as the ECB gathers for its monthly meeting.
With the eurozone economy shrinking, inflation dropping and unemployment at record highs, there’s a strong expectation that the ECB will heed the danger signs and cut eurozone interest rates – trimming the main refinancing rate from 0.75% to 0.5%.
But some economists are hoping for more decisive action from Draghi — such as new measures to stimulate bank lending to Europe’s small businesses.
The ECB has decamped to Slovakia, Bratislava for today’s meeting. We get the decision at 12.45 BST, but followed by the closely-watched press conference at 1.30pm BST.
We shouldn’t pretend that a small cut in interest rates will cure the patient, though.
As Jennifer McKeown of Capital Economics points out:
The possible announcement of policies to stimulate bank lending, particularly to SMEs and in the region’s periphery, might be more helpful.
But even this would leave the ECB lagging behind other central banks.
So, we’ll see. I’ll be watching the events in Bratislata, along with other developments around the eurozone and beyond….
More from Eurozone crisis live
On our daily blog we report on the turmoil in the bond, stock and currency markets – as well as the political dramas at the heart of the eurozone crisis.
E.C.B. Cuts Key Interest Rate to 0.5%, a New Low
By JACK EWING
Published: May 2, 2013
BRATISLAVA — The European Central Bank cut its benchmark interest rate to a record low Thursday, a mostly symbolic move that could lift morale in the euro zone but is unlikely to jolt the Continent out of recession.
The E.C.B., meeting in Bratislava, Slovakia, cut its benchmark interest rate to 0.5 percent from 0.75 percent, which was already a record low. It was the first change in interest rates since July 2012 and the bank’s fourth cut since Mario Draghi took over as president of the E.C.B. in November 2011.
The central bank will continue providing unlimited loans to banks at the benchmark interest rate “as long as needed” and at least until mid-2014, Mr. Draghi said at a press conference after the announcement.
Even at its new low of 0.5 percent, the E.C.B.’s benchmark rate remains higher than the 0.25 percent rate the Federal Reserve has had in place since late 2008. On Wednesday, the Fed said it would maintain its stimulus campaign, buying $85 billion a month in Treasury and mortgage-backed securities. The Fed added that it would consider adjusting its efforts to spur growth and reduce unemployment in the United States.
A cut by the E.C.B. was widely expected after a series of economic indicators in recent weeks foreshadowing an extended downturn in the euro zone, with recession even threatening the seemingly unstoppable Germany economy. On Thursday, two stalwarts of corporate Germany, BMW and Siemens, warned of lower profits for 2013 because of the downturn in European markets.
Many economists argued that the E.C.B. was practically obliged to cut rates. Inflation in the euro zone was just 1.2 percent in April, well below the E.C.B. target of about 2 percent. The central bank is sworn to maintain price stability above all else, which includes heading off deflation — a downward spiral in prices that can be even more destructive than inflation.
But there is widespread skepticism about the likelihood that the rate cut will do much to restore the flow of credit in countries like Italy and Spain, which are in the midst of long-term slumps. The cut could have negative effects in Germany, where low interest rates have fueled steep rises in home prices in some cities.
“A rate cut will only have a small impact on the economy but it will signal an easier monetary policy stance,” Marie Diron, an economist who advises the consulting firm Ernst & Young, wrote in an e-mail ahead of the decision.
Many banks in Europe, whose shyness to lend the E.C.B. is trying to address, may regard the cut with mixed feelings. While the new rate will lower the cost of raising money, the cut may also reduce the profit margin on mortgages or other forms of lending. Many banks in Europe are barely profitable and can ill afford any more problems.
Some economists argue that there is little the central bank can do to force-feed credit to small businesses in countries like Greece and Portugal that are suffering prolonged downturns. Banks’ reluctance to grant loans reflects the sad fact that many businesses and consumers are poor credit risks, Richard Barwell, an economist at Royal Bank of Scotland, wrote in a note to clients.
Mr. Barwell referred to a recent E.C.B. survey that found that the biggest problem for businesses in countries like Italy is finding customers, not credit. The E.C.B. cannot help businesses with that problem, he wrote. Still, he said, “the E.C.B. has reached the point where it has to do something.”
A cut may, however, help some exporters by helping to reduce the value of the euro compared to the dollar and other major currencies. A lower official interest rate tends to make it less attractive to hold euros, and drive down the exchange rate, making European products cheaper in foreign markets.
A rate cut “would be a sign that policy makers understand it is time to find a way to compete,” Marco Tronchetti Provera, chief executive of the Italian tire maker Pirelli, said during an interview last week.
The E.C.B. also cut the higher rate it charges for overnight loans, the so-called marginal lending facility, to 1 percent from 1.5 percent. The benchmark rate of 0.5 percent, known as the main refinancing rate, is what banks pay to borrow for a week or more and is the rate that normally has the most powerful effect on the economy.
The E.C.B. left the rate it charges banks to park money at the E.C.B., the deposit rate, at zero. There has been speculation in the past that the E.C.B. would cut the deposit rate below zero, charging banks to park their money, in order to discourage lenders from hoarding cash rather than issuing loans. But there was fear that move could have unintended consequences.
And in another step to ease the credit crunch in southern Europe, Mr. Draghi said the E.C.B. would also consult with European Union institutions on how to revive the market for asset-backed securities, in which outstanding loans are bundled and sold to investors. A more lively market for asset-backed securities could also help lending, although Mr. Draghi did not immediately explain what steps he had in mind.