Mario Draghi: Interview with Frankfurter Allgemeine Zeitung
Interview with Mr Mario Draghi, President of the European Central Bank, in the Frankfurter
Allgemeine Zeitung, conducted by Messrs Holger Steltzner and Stefan Ruhkamp, published
24 February 2012.
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For two years, Europe's politicians have been promising to save the euro, whatever
the cost. But the problems have kept on growing. Do you believe the second aid
programme for Greece will be successful?
Yes, I do. But the work has only just begun. With the adoption of this comprehensive
financial package, we are sending a clear signal: Europe is helping Greece, and important
international institutions, such as the IMF, are assisting as well.
What is different this time?
Of course the ball is now in Greece's court. The country has started to take action: for
example, to cut the minimum wage. Above all, however, political debate in Greece has
changed. The Greek people and Greece's politicians now have a completely different attitude
towards their country's responsibilities. The key to controlling risks lies with the
implementation of the programme, which has to be flawless. The upcoming elections will be
very important. It is essential that the new government supports the programme, just as the
old one has. Since everything depends on the implementation of the programme, monitoring
is very important. And that is being taken care of.
Is that also what the "escrow" account is for, which has been set up for Greek debt
servicing?
In organising such a large financial aid programme, we need effective assurances to
minimise the risk as much as possible. That is why there is such an account for the first time.
The haircut requested of Greece's private creditors has been raised again. Do you
expect voluntary agreement?
Yes, all parties involved have signalled their agreement.
Then there is no need for clauses to enable a binding haircut for all creditors, the
socalled Collective Action Clauses?
No, they may need them to achieve a sufficient level of participation among creditors.
That doesn't sound quite so "voluntary" any more. Won't it then come to what the
ratings agencies call a default? Will the ECB then accept Greek bonds as collateral?
It is not a rating default yet. But, of course, that could happen, if Greece introduces the
clauses by law. Then we will have to stand by our principles. The alternative is: we could
ignore it and continue to accept bonds as collateral, which we don't intend to do.
Or you obtain collateral from the other Member States.
That is the solution it boils down to. Via the EFSF, additional safeguards to the value of
€35 billion are to be provided for a transitional period, so that the Eurosystem could then
accept Greek bonds as collateral, even if they were to be downgraded to "selective default".
We are not the IMF of Europe. Our primary task is to ensure price stability in the euro area
as a whole, irrespective of what is happening in an individual country such as Greece.
By removing the Greek bonds held by the central banks from the debt restructuring,
the ECB has gained a privileged position as creditor. How is that justified?
The bonds were bought for monetary policy reasons. There is therefore a public interest. But
even more important is the fact that, in the end, it is taxpayers' money. It is our duty to
protect the taxpayers' assets. Moreover, we are not there to contribute to government
financing by dispensing with claims.
But the ECB has always said that the purchases were part of its monetary policy. If it
was an independent decision, why shouldn't the central banks bear the losses, which
they would take over, without hesitation, if the financing of a bank proved to be
unprofitable? What is the difference between losses on government bonds and losses
from a bank failure?
Look at the United States and the United Kingdom. In both cases, the central banks have
bought up large amounts of securities and the State has secured it with guarantees.
But for the markets, this means that the risk for private creditors has become greater.
They have to count on the fact that, if the worst comes to the worst, the central bank
will be serviced first. How great is the damage for the European government bond
market?
Not very great, because the amount of our bond purchases, compared with the entire
market, is small. For that reason, we do not see any effect on risk premia either. Moreover,
Greece is a special and unique case of private sector involvement.
The call for Greece's creditors to accept a haircut makes it clear that there is no such
thing as a risk-free investment any more. Is that a problem?
That issue was processed by the markets a long time ago. The decisions of autumn 2010 (at
the Deauville summit) put an end to all public debtors borrowing at the same conditions,
irrespective of their creditworthiness.
Does the disappointment that there is no absolute security any more actually, in the
end, have a stabilising effect on the financial system?
Of course there is an excess of risk aversion and fluctuations, and that may cause great
difficulties for monetary policy. But in the long run, the different perception of risks makes the
system more stable. And what's more, it forces governments to keep their finances under
control. Before the introduction of the euro, corrective signals came from exchange rates.
After this corrective mechanism ceased to exist, some governments thought they could do
and allow what they wanted, without having to pay. Now market prices are being corrected
and that is a good thing. However, we must of course be careful that the markets do not
overdo it and send false signals. Markets can be stabilising up to a point, but destabilising
beyond it.
How can you tell whether a market price is right or wrong?
One indication is extremely high volatility. Strong fluctuations can shake confidence so badly
that nobody dares to lend out money any more. Interbank lending then becomes virtually
impossible and the banks can no longer issue any bonds either, even when these - like
covered bonds - are well secured. In such a situation one knows that something is wrong.
And then the central bank must intervene?
If the operation of monetary policy is no longer certain because of the distrust, if monetary
policy is no longer reaching the economy which negatively affects credit, overall demand and
ultimately price stability. Yes, then the central bank must act and work out a strategy for
dealing with the disruptions. Of course it depends on the reason for the risk aversion. If it is
because of a lack of liquidity, or even just the assumption that the counterparty might be
short of funds, then the central bank could help. But if banks have a capital shortfall, then it is
not the task of the central bank.
Many Germans are concerned about the majority composition of the ECB Governing
Council, which in numerical terms is dominated by central bankers from fiscally weak
countries. They fear inflation. What would you say to these people?
The ECB acts according to two maxims: that it should ensure price stability and should not
provide monetary financing to governments. We operate independently of our nationality. In
the early phase of the currency union, the former president of the Bundesbank, Hans
Tietmeyer, whose picture hangs on the wall here, once refused to sit at a table on which
name cards specifying the participants' respective institutions had been laid out. He said:
"Clear them away, we are here in a personal capacity and not as envoys of our institution or
country." This is the spirit of the ECB.
Even after the debt forgiveness, Greece's government debt will amount to 120% of
annual overall economic output. That is barely sustainable for a country with a sound
economy, but much less so for a country in a poor competitive position. What is so
terrible about the idea that Greece might give up the euro?
Firstly there is no provision in the treaty for a country to leave or to be excluded from the
euro. But even apart from that: do you think that by leaving the euro, printing a new currency
and undergoing the subsequent adjustment, Greece could avoid the structural reforms that
are necessary?
No, they remain necessary. But it would be easier to find agreement for the adjustment
and, above all, the sheer possibility of an exit would improve the basis for the
negotiations with Greece. Without this option, the rest of Europe is signalling:
whatever you do, whatever happens, we will fund you.
That is not true, because Member States and the IMF would not finance a programme that
lacked credibility.
But if the Greeks remain in the euro area, they must reduce their costs and, for
example, cut the wage level by at least a third. Will that succeed?
There is no alternative, because even if a country has flexible exchange rates and devalues
but make no other changes, it has not gained anything. It depends on the real lowering of
wage costs. In the currency union, this occurs when nominal wage costs fall or remain
contained, while prices remain stable. Experiences in the 1970s show that this is the more
sustainable method to regain competitiveness. Otherwise we get inflation with high social
costs over the long term.
If Greece keeps the euro, the adjustment will take many years. During that time, the
country will import more than it exports. As this current account deficit will no longer
be financed by private lenders, this task will fall to the central bank.
That is correct, there will be deficits for a while. But Greece is making progress. A part of the
adjustment in wage costs that is required to restore competitiveness has already been
achieved. Some of the agreed structural reforms will only make themselves felt in the long
term, but others, such as efforts to make the labour market more flexible, can immediately
strengthen confidence.
The funding of such deficits of fiscally weak euro countries are visible in the huge
balances of the TARGET payment system. Would the Eurosystem have already
collapsed without this rescue system, this bailout?
I cannot see any bailout there. We have a currency union and a payment system which is
organised by the ECB as a single platform. And there are payment flows from one country to
another. The fact that these balances arise at all is because of the disturbed conditions in the
money market, in which banks distrust each other. Rather than lending money to each other,
they borrow it from the central bank and deposit it there too.
Does that not entail enormous risks for central banks, at which TARGET claims are
mounting up because of the imbalances? For the Bundesbank alone, they amount to
almost €500 billion.
There are no risks in a cohesive monetary union. There are certainly grounds to monitor the
imbalances, because in a currency union with a well-functioning interbank market, the
TARGET claims would not become so large in the first place.
Do you expect the TARGET balances to disappear again one day?
Yes, of course. We have seen in the past that imbalances recede whenever the situation
improves.
In December the ECB provided financing of almost €500 billion for the unusually long
period of three years. The second operation of this kind, which will be conducted at
the end of February, could be of a similar magnitude. Can you understand that these
large sums make many people feel uneasy, and lead them to wonder if they will one
day have to foot the bill?
It is important to explain things well. That's why the media are so important.
Only we are worried too, unfortunately.
The net inflow from the first three-year tender, at a good €200 billion, was not that high.
There is no sign of inflationary tendencies in the euro area, quite the opposite. And if there
should be any sign of future inflation, we have the instruments with which to absorb the
liquidity again within a short space of time.
But with the longer-term refinancing operations, the ECB also relaxed the collateral
framework.
We have made it possible for individual loans to be lent on. This mainly benefits the smaller
banks, which do not have the capacity to securitise such credit claims and then use them as
collateral with the central bank. This extension involves additional collateral of around
€600 billion, which, as a result of the large haircuts, can permit additional lending of
€200 billion. In relation to the size of the euro area, that is not such a big sum. In addition, the
national central banks bear the risk stemming from these loans.
There were rumours that the ECB asked the banks to borrow a lot of money and then
to use it to buy government bonds.
Who said that? I'd like to have a word with that person. No, we made it very clear that the
banks take their own decisions. We would prefer it if they would lend the money to
companies and households. Incidentally, the impact of the three-year tender was
underestimated when I announced it in December, because many people expected the ECB
to expand its government bond purchases, the famous "bazooka". Maybe I should have
called the tender "Big Bertha" when I announced it, then everyone would have listened.
The ECB is hardly buying any bonds of fiscally weak euro area countries at the
moment. Wouldn't this be a good opportunity to put an end to this programme that is
so controversial, particularly in Germany?
The markets are still vulnerable, and so we have to be very careful about announcing the
end of such an instrument. The Securities Markets Programme has served a purpose since it
was introduced.
If the situation were to worsen again, would you be ready to expand the collateral
framework again?
That would be for the Governing Council of the ECB to decide, but I personally am not in
favour of it. We have done enough. The collateral rules should not be relaxed further. In
future, based on the current outlook, it will rather be a question of tightening the requirements
again.
You said recently that the ECB's financing measures had prevented a credit crunch in
December. What has changed since then?
Banks were tightening their credit conditions. This applied more to countries such as
Portugal and Spain and less so to Germany. But following the very weak fourth quarter of
2011, both hard indicators and confidence indicators have gradually improved. The situation
varies considerably across the individual euro area countries, but it has stabilised overall.
Have the positive signs increased over the past two weeks?
Yes, I would say so, although uncertainty remains high.
Is there still a risk of a "lost decade" of very low growth, as experienced in Japan?
No. What makes me confident are the reforms that have been started in Europe in the past
four or five months.