Introductory statement to the press conference (with Q&A)

Mario Draghi, President of the ECB,
Vítor Constâncio, Vice-President of the ECB,
Frankfurt am Main, 8 March 2012

Jump to the transcript of the questions and answers

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council.

Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. The information that has become available since the beginning of February has confirmed our previous assessment of the outlook for economic activity. Available survey indicators confirm signs of a stabilisation in the euro area economy. However, the economic outlook is still subject to downside risks. Owing to rises in energy prices and indirect taxes, inflation rates are now likely to stay above 2% in 2012, with upside risks prevailing. Nevertheless, we expect price developments to remain in line with price stability over the policy-relevant horizon. The underlying pace of monetary expansion remains subdued, consistent with contained inflationary pressures over the medium term.

Looking ahead, we are firmly committed to maintaining price stability in the euro area, in line with our mandate. To this end, the continued firm anchoring of inflation expectations – in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term – is of the essence.

Over recent months, a wide range of additional non-standard monetary policy measures has been implemented by the Eurosystem. These measures, including in particular two three-year longer-term refinancing operations, were decided upon against the background of exceptional circumstances in the last quarter of 2011. The first impact of these measures has been positive. Together with fiscal consolidation and stepped-up structural reforms in several euro area countries, as well as progress towards a stronger euro area economic governance framework, they have contributed to a significant improvement in the financial environment over recent months. We expect that the three-year longer-term refinancing operations will provide further support for the ongoing stabilisation in financial markets and, in particular, for lending activity in the euro area. All our non-standard monetary policy measures are temporary in nature. Furthermore, all the necessary tools to address potential upside risks to medium-term price stability are fully available.

Let me now explain our assessment in greater detail, starting with the economic analysis. Real GDP contracted by 0.3% in the euro area in the fourth quarter of 2011. According to recent survey data, there are signs of a stabilisation in economic activity, albeit still at a low level. Looking ahead, we expect the euro area economy to recover gradually in the course of this year. The outlook for economic activity should be supported by foreign demand, the very low short-term interest rates in the euro area, and all the measures taken to foster the proper functioning of the euro area financial sector. However, the remaining tensions in euro area sovereign debt markets and their impact on credit conditions, as well as the process of balance sheet adjustment in the financial and non-financial sectors, are expected to continue to dampen the underlying growth momentum.

This assessment is also reflected in the March 2012 ECB staff macroeconomic projections for the euro area, which foresee annual real GDP growth in a range between -0.5% and 0.3% in 2012 and between 0.0% and 2.2% in 2013. Compared with the December 2011 Eurosystem staff macroeconomic projections, the ranges have been shifted slightly downwards.

This outlook remains subject to downside risks. They notably relate to a renewed intensification of tensions in euro area debt markets and their potential spillover to the euro area real economy. Downside risks also relate to further increases in commodity prices.

Euro area annual HICP inflation was 2.7% in February 2012, according to Eurostat’s flash estimate, slightly up from 2.6% in January. Looking ahead, inflation is now likely to stay above 2% in 2012, mainly owing to recent increases in energy prices, as well as recently announced increases in indirect taxes. On the basis of current futures prices for commodities, annual inflation rates should fall again to below 2% in early 2013. Looking further ahead, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain limited.

The March 2012 ECB staff macroeconomic projections for the euro area foresee annual HICP inflation in a range between 2.1% and 2.7% in 2012 and between 0.9% and 2.3% in 2013. In comparison with the December 2011 Eurosystem staff macroeconomic projections, the ranges for HICP inflation have been shifted upwards, notably the range for 2012.

Risks to projected HICP inflation rates in the coming years are seen to be still broadly balanced, with upside risks in the near term mainly stemming from higher than expected oil prices and indirect tax increases. However, downside risks continue to exist owing to weaker than expected developments in economic activity.

The monetary analysis indicates that the underlying pace of monetary expansion remains subdued. The annual growth rate of M3 was 2.5% in January 2012, up from 1.5% in December 2011. Loan growth to the private sector also remains subdued. However, its annual rate (adjusted for loan sales and securitisation) picked up slightly in January to 1.5% year on year from 1.2% in December.

The annual growth rates of loans to non-financial corporations and loans to households (adjusted for loan sales and securitisation) stood at 0.8% and 2.1% respectively in January. The volume of MFI loans to non-financial corporations declined only slightly in January, following the pronounced decline in December. By contrast, the flow of loans to households in January was positive.

Following the signs of improvement in the financial environment, it is essential for banks to strengthen their resilience further, including by retaining earnings. The soundness of banks’ balance sheets will be a key factor in facilitating an appropriate provision of credit to the economy.

To sum up, the economic analysis indicates that price developments should remain in line with price stability over the medium term. A cross-check with the signals from the monetary analysis confirms this picture.

Looking ahead, in order to deliver a favourable environment for sustainable growth and to support confidence and competitiveness, the Governing Council stresses the urgent need for governments to make further progress towards restoring sound fiscal positions and implementing the structural reform agenda. Regarding fiscal consolidation, many governments in the euro area are making progress. Continuing with comprehensive fiscal consolidation and complying with all commitments remains essential. In this respect, the 2012 European Semester should be used to enforce rigorously the reinforced fiscal surveillance mechanism. Equally important are structural reforms to increase the adjustment capacity and competitiveness of euro area countries and to strengthen growth prospects and job creation. In this area, more progress is desirable. The Governing Council strongly welcomes the European Commission’s Alert Mechanism Report on macroeconomic imbalances and expects the proposed in-depth country reviews to actively support the reform processes under way in euro area countries.

We are now at your disposal for questions.

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Transcript of the questions asked and the answers given by Mario Draghi, President of the ECB, and Vítor Constâncio, Vice-President of the ECB

Question: Two questions, as permitted. One: I have heard or many heard your message clearly about LTROs, the temporary measure and the temporary nature of it, but for those who have not heard it, can you tell us about the chances of a third LTRO or something further down the line?

And the second question, maybe along the same lines: how concerned or upset were you by that leaked letter from the Bundesbank or, more notably, from Jens Weidmann and, in that context also, how concerned are you that the ECB is not necessarily speaking with one voice at a time when it is most critical?

Draghi: On your first question: the LTRO, both operations, I would say, are an unquestionable success. The risk environment has improved enormously, markets have reopened, both senior and secure markets, covered bond markets, and even the interbank market – although still limited to the short term and to national boundaries – has also started working a little better. Certainly, we see many signs of a return of confidence in the euro. So-called real money investors have, to some extent, come back. We see the presence of money market funds, which were the first to take flight from the euro a year and a half ago. We see again pension funds, we see investment funds – so, all in all, we see that great progress has been achieved. I don’t really need to spend much more time on this; you only need to compare the situation in November of last year with that today. Let me also add that this is not only the effect of the LTRO, but also of the serious reform effort that has been undertaken by several governments in the euro area and of the improved governance of the whole euro area; here I am referring especially to the fiscal compact. But basically, the LTRO had the powerful effect of removing what is called “tail risk” from the environment. Now I think the ball is in the court of governments and other actors, especially banks, to continue their reforms, to repair their balance sheets so that they – especially banks – can actually support the recovery. The LTRO has created a situation where these efforts can certainly be undertaken, but certainly neither governments nor banks nor the other key actors ought to be complacent.

On the other issue, let me say what I say all the time: I think we all – when I say “we”, I mean the Governing Council – we all have to do the right things and we have to do them together. So let me first, incidentally, say that my personal and professional relationship with Jens is excellent. So that is one thing I want to say. I would also like to add that nobody, contrary to what some journals, newspapers and magazines have said, nobody is isolated in the Governing Council. And the Bundesbank especially is not isolated, and there are several reasons for this, besides its being a very important central bank. As I have had many opportunities to say, I really cherish the culture and the tradition of the Bundesbank, of maintaining price stability. I think we all collectively owe a lot of what we have learned about the stability culture to the Bundesbank and to Germany. But now we are all custodians of stability, there is not one specific custodian of the stability culture. We all share the same view, the same ideals. So I think that ought to be kept in mind. The other thing that is related to the letter – and, incidentally, I don’t think that the leak came from Jens himself, I am certain that it was not him – is that the substance, the content of that letter is present in all our minds: the possible risks of our monetary policy, the complications – which are largely communication-related, I would say – created by the use of additional credit claims, and the TARGET2 balances as well. We always say that it is normal in a monetary area to have TARGET2 balances. We say that it is within the Treaty, that these balances are a normal product, especially when interbank markets don’t function. But it is also true that these TARGET2 balances reveal structural differences and structural weaknesses in some parts of the euro area, and this is therefore not something that can be ignored. We ought to think about it and reflect on it. And I think that on this, we completely share these views. Finally, let me say: we are all in the same boat. And I think that there is nothing to be gained by fighting or arguing publicly outside the Governing Council.

Question: First, last month you said that you didn’t even discuss interest rates at your monetary policy meeting. Did you discuss them this month?

Second, based on the latest information that you might have, how confident are you that the Greek private sector involvement (PSI) will be a success?

And finally, you said in Mexico that a special bank lending survey is being conducted to assess the impact of the first LTRO. Could you perhaps tell us what the results are and whether you are actually intending to publish that survey?

Draghi: In answer to your first question, no, we did not discuss interest rate changes.

As for the Greek PSI, the operation is unfolding as we speak, and so it would be completely inappropriate for me to comment on it.

Lastly, the bank lending survey I referred to in Mexico is an ad-hoc survey for internal use and we do not plan to publish it immediately. However, it certainly shows that from the very, very negative trends in credit and money that we saw in the last three to four months of last year – for the first time in history and the history of the euro, the absolute level of M3 declined for three consecutive months and the volume of loans to the private sector, non-financial corporations, also declined for two consecutive months – there has been a modest pick-up in credit and bank lending since the first LTRO.

Question: Two questions relating to the same subject. Did the Governing Council discuss the issue of a possible restructuring of the Anglo Irish Bank’s promissory notes?

And second, do you think that such a restructuring or any kind of concession on the promissory notes would help Ireland to return to the bond markets next year as planned and would also perhaps help the Irish government in its quest to pass the referendum on the fiscal compact?

Draghi: On your last question, let me say that I am really confident that the referendum will pass and that the fiscal compact will be approved, because Ireland is probably one of the programme countries that has made most progress, under conditions that have been very harsh. And, in spite of these conditions, it has really delivered. We are also aware that there are certain fragilities that need to be taken care of.

On your first question, we didn’t discuss it. It is being examined, but it was not part of the Governing Council’s discussions.

Question: On the topic of growth, you mentioned that you expect a gradual recovery over the course of this year. Can you give us an idea as to where the ECB sees the sources of this growth coming from? If you look at austerity, higher oil prices, rising unemployment, none of these things seem to bode well for a recovering economy? Can you give us a sense of how you all assess where this growth is going to come from?

Second, back to the letter and the issue with the Deutsche Bundesbank, one thing that it seems to raise is the fact that these debates within the ECB aren’t really published in any kind of way, e.g. meeting minutes or vote counts. Now that you are President of the ECB, would you maybe consider making these internal debates public – even without mentioning names – so that they do not create such a drama when they do become public?

Draghi: Before I answer your two questions, let me say that I read everything that you write very carefully. You recently wrote a piece on the risks that are in the ECB’s balance sheet because of the LTRO. In that article, you compare the size of the balance sheet, which is now around 3 trillion euro or something to GDP and conclude that the expansion has been greater in the euro area than in the United States or the United Kingdom. I am dealing with this now because I have also seen this mentioned elsewhere. Now, one has to look at the balance sheet for what it is. The comparison of the overall amount does not really relate to the issue of whether risks have increased or not. The Eurosystem has a very large volume of assets that have nothing to do with monetary policy, e.g. gold, foreign exchange reserves, among other things. If you compare the ECB’s balance sheet with that of the Federal Reserve System or the Bank of England, the latter are very lean, they do not have the same volume of assets. You have to make the comparison in terms of the additional risks caused by the two LTROs. You have to compare the ratio of monetary policy instruments to GDP in the three different areas of the world. If you do that, the ratio is actually 15% for the ECB, 19% for the Federal Reserve System and 21% for the Bank of England. Therefore, at the present time, to say that the risks for the ECB’s balance sheet are higher than those for Federal Reserve System and the Bank of England is not correct. The same conclusion can be reached if you look at the rates of change. The balance sheets of the other major central banks have expanded in a short period of time by much more than that of the ECB. That was a point I wanted to make, because it also clarifies some of the concerns that have been expressed in various quarters, not only in the Wall Street Journal.

Now, in answer to your questions, the recovery in growth is going to be very gradual. But there are reasons for that: foreign demand, the very low level of short and medium-term interest rates, and the extraordinary improvement in the risk environment, which if it is maintained, is probably going to be the main factor that we can count on. There are also the structural reforms. We have always assumed that structural reforms have an impact on growth in the long term, but that is not always true for all reforms. There is first of all a signalling effect, there is a confidence effect, but in the case of some reforms, there are also some reforms that have an impact on growth, even in the short term.

With regard to your last question on transparency, I think it is stretching it a bit to say that if there are leaks, you need to be more transparent. In any case, the ECB is very transparent. We have regular press conferences, we have hearings in parliament, we have press releases, we have publications – we are transparent. It must also be kept in mind that we are not – either politically or economically – in the same situation as the United States or the United Kingdom, namely we are not one country. To some extent, you want to keep the deliberations of the Governing Council as separate as you can from the national identity of its members. I will never forget a conversation in which Hans Tietmeyer said that we should “remove the name plates, which in the first meetings of the Governing Council used to say “Germany”, “Italy”, etc. He said that “we are here in our personal competence; we are not here to represent our countries”. This common action for the stability of the euro is well protected now. However, we will certainly think about it, it is a subject of ongoing discussion.

Question: I have two questions. The first regarding the criticism of the Brazilian president that monetary policy in the United States and the euro area might have negative impacts on Brazil and other developing countries. I think the terms used were “monetary tsunami” and “currency war”. Do you have any moral scruples about imposing monetary policy measures that have negative spillover effects on other countries, especially poorer countries?

Secondly, you said that nobody in the ECB Council is isolated. My impression is that at the Deutsche Bundesbank this is seen a little bit differently. Obviously, you do not even agree on the question of whether you agree. So, is it not time to think about whether the whole thing, a currency union without political union, is working when the central bank of the largest country is so opposed to the ECB?

Draghi: On the first point, I think we are doing the right thing with our monetary policy. Originally this argument started between some emerging countries and the United States. Now it has somehow expanded to involve Europe. The reason this argument is raised is the fear that the exchange rate could actually be affected by these monetary policies. Now, speaking on behalf of the ECB – I cannot speak for the US Federal Reserve System – we do not run our monetary policy for exchange rate reasons or with exchange rate objectives, we do this only in line with our primary remit, namely price stability in the medium term. When you look at the data, if anything, the euro exchange rate has appreciated since we conducted the two LTROs. As I was saying before, we are observing a significant inflow, renewed interest or confidence in the euro by real money investors, by investors not resident in the euro area. So this criticism does not seem to be grounded, at least as far as we are concerned.

On the second point, as I said before, I do not think the Bundesbank is isolated. Do not forget, the decision on the LTRO was unanimous. So, it is not isolated. And even when there are differences of opinion, it is not just Germany against everybody else or the Bundesbank against everybody else. There are always differences of opinion. And if I remember correctly, the Bundesbank has never been alone in its opinion. So, I do not think that isolation belongs to our way of working; it certainly does not belong to mine, and I am determined, as I said before, to do the right things and to do them together.

Question: The staff projections were revised downwards for growth and upwards for inflation. What does this mean for monetary policy in the future?

And second, if the desired effect of the LTROs that you mentioned earlier is not realised, what can you do? What else can the ECB do? Can you force banks to lend or would you maybe even consider quantitative easing?

Draghi: On the first point, we have to keep our eyes squarely on our primary remit, namely price stability in the medium term. When you look at that, we see upward risks, coming from the higher than expected oil prices, from indirect taxation that has been widely used by governments in their fiscal consolidation efforts and from administered prices. But we can also see downside risks to staff inflation projection coming from an environment which remains weak, from a labour market which, as you can see, remains slack with unemployment actually going up. So, basically, that is the outlook.

And on the second question, so far, the two LTROs have had a very powerful effect, but it is also a complex one, which means that we have to look at how exactly the economic and financial landscape has changed following these two operations. And there are many, many complexities that have to be thoroughly analysed.

Question: And would you consider quantitative easing?

Draghi: We never pre-commit. Now that we have conducted the LTROs, we want to see exactly what the effects are.

Question: In recent years, also under your predecessor, Mr Trichet, we have heard many declarations and statements and then we have seen a very interesting history of ECB interventions made in spite of these or in opposition to them, that have been forced by real economic developments. You have tried to voice confidence, but if it is based only on monetary policy approaches, it is very risky. I am just pointing to the fact that, to a large extent, financial markets have already priced into their investment decisions the possible or potential effects of the crisis in Syria and, with regard to Iran, we all know where this might lead to in terms of turning things upside down. Have you taken these aspects into account and, if not, when will you begin to do so?

Draghi: Well, you can never be certain of how much the global environment is going to change following developments as dramatic as the ones you mention. In answer to your question, when I said that we see some upside risks for inflation developments, I mean that the oil price could end up being higher than expected and this is linked to these risks.

Question: You talk about the LTROs as being another temporary measure, but we have seen the ECB engaging in these extraordinary measures since 2007. As of today we have seen the Bank of England with its interest rate at an all-time low for three years and we continue to see extremely low rates from all the major central banks. Is this the way that you thought this would pan out when central banks began easing and were doing coordinated easing several years ago? Did you think that it would last this long? How do you see this environment changing, or are we in a period of long, stable rates? Do you think that markets have become overly dependent on or addicted to the notion of global liquidity and lower rates?

Draghi: I think we called them non-standard measures for the very reason that they are taken for non-standard situations. They are temporary in nature. In a sense, we have to go back to normal, classical central bank policy. We should not forget that when we decided on the two LTROs, the market conditions were as I described them earlier. So when people say that the LTRO could make the banking system more dependent on the ECB, they forget that there were no interbank markets before, because they were completely clogged up. If anything, we are actually witnessing the opposite, as we can see that markets are gradually improving their liquidity situation. We will watch what happens carefully. As I have said before, these operations have been successful, but they are also very complex in their effects. Also, one cannot deny that monetary policy cannot do everything – governments have to do their bit in terms of undertaking complete fiscal consolidation and implementing structural reforms and, as I mentioned in the Introductory Statement, the banks have to improve the resilience of their balance sheets, because that is essential for credit and for lending. We address the aspects that relate to liquidity and funding, and we cannot and do not want at all to replace either the fiscal actions of the governments or to address a possible lack of capital held by the banks. That is not our job.

Question: Two questions please. From a risk management point of view, do you think it is appropriate for Eurosystem central banks to prepare for the possibility of the exit of one euro zone member, since it does not seem to be something totally impossible or unlikely?

Secondly, we are now in the third week of the SMP without any purchases by the European Central Bank. Could you perhaps say if the SMP is now art of the history of the ECB and, more generally, if you think that engaging the SMP back in May 2010 was the right thing to do, or was it a policy mistake by the ECB?

Draghi: On the first question: no, we don’t prepare, we don’t have any plan B. I have often said that to have a plan B means to admit defeat and we do not want to be defeated. To me, it is equivalent to conceiving a reality which goes beyond the Treaty. The ECB staff knows how to manage risk, but this is not something we foresee.

As regards your second point you are right: the SMP has been quite inactive in the last few weeks. Again, as I said at the very beginning of my mandate, the SMP is neither eternal nor infinite.

Question: Two questions. First of all, Jürgen Stark described the quality of the ECB’s balance sheet today as “shocking”. Can you explain why he said that? He must know what is in the books, probably more than we do. Shouldn’t we be worried about comments such as that from a former Executive Board member?

My second question is about the LTRO of last time; something has been picked up in the market is the idea that banks operating across Europe were actually obtaining liquidity from national central banks in individual countries so that they could match liabilities and assets by country as a hedge against a possible euro zone break-up. Is that something you observed?

Draghi: I don’t know exactly what Jürgen meant by that. Incidentally, he was still a Board member when he voted in favour of the LTRO, of both LTROs. But then he left when the actual collateral was provided. So I don’t know exactly. He certainly didn’t see the collateral or anything like that. I think they must have all read Brian Blackstone’s article and decided that. The ratio that matters is 3.5 trillion euro divided by the GDP of the euro area and not 1 trillion euro divided by the GDP of the euro area. But I will talk to him and I will ask him what he means.

On your second point, let me say one thing. There is one big difference between the first and the second LTRO, which I don’t think I have mentioned. The number of participants went up from 500 and something – keep in mind that the participation in these tenders is something over 100 or even less, on average. The first LTRO had 500 and something and the second LTRO had 800 banks. Of these, 460 are German banks, even though I should hasten to add the overall amount borrowed by German banks is lower, or much lower, than the overall amount borrowed by other countries. And here I come to your point. Comparisons by country are actually appropriate up to a point, I am not talking about the 430 small German banks – incidentally I would love to review the places, the towns and villages where these banks are, but I cannot do it because often they would probably be the only bank in town and so they could be recognised. But that, to me, says one thing: that this money is now closer to the small and medium-sized enterprises (SMEs) than it was before. Which you remember was one of the reasons, one of the arguments, for involving a very large number of participants. I am not saying that this money will necessarily go to the SMEs, but it is certainly one step closer. We have this in mind because 80% of euro area employment depends on the SMEs. But going back to your point: there are some large banks that have borrowed money through their avatars in different parts of the Union. That’s why it is kind of difficult to make an exact attribution of borrowings and drawings on the facilities and countries. Whether they do this to match their assets and liabilities in the single countries, I don’t know. There was one banker – actually a British banker – who said that he was doing it for this reason. But I do not know about the others. Some of them, for example, do not want to be seen borrowing too much under the name of the parent company and they borrow under different names.

Question: You mentioned several factors before behind the stabilisation of the European economic and financial landscape. You did not really stress the point of the firewall which has been prepared for Greece and, more generally, the European firewall. How do you judge the progress being made towards implementing this firewall for Greece?

And, second, do you see sufficient progress towards building up larger IMF resources against global instability at the next IMF meeting in April?

Draghi: I think the two things are actually linked. The IMF has made it quite clear, or, rather, some members of the IMF have made it quite clear, that they would be ready to give more resources to the IMF’s General Resources Account, and indirectly, some of them, to the euro area, only if an adequate firewall were in place. At the same time, the building of an adequate firewall has to take into consideration the fact that there are many different countries, many different governments, and many different budget situations. That’s why it has taken so long. But at the European Council on 9 December, and at the European Council at the end of January, two things were basically restated. The first thing is that the adequacy of the EFSF resources would be reviewed in March. The second is that the creation of the ESM would be brought forward to, I think, May or June. Then it was said in a subsequent statement that the ESM would be capitalised at a faster pace than had been originally stated. So, all in all, one has to be confident that the adequate efforts, although slowly, will bear fruit. Actually, there will be an adequate firewall in place and, following that, I think we will be able to have the IMF resources in the General Resources Account.

Question: My question concerns Greece. The markets have been rather nervous during the last few days as far as the consent of the private investors to the debt cut is concerned. Do you think this is justified? What are you expecting? And you said before that you do not have a plan B. But what if not enough investors give their consent to a debt cut?

Draghi: Markets were nervous two days ago. Today they are not nervous and are actually quite positive. They seem to be happy with what is going on – and they certainly know more about what is going on than I do. Having said that, it would not be proper for me to make comments about something that is currently unfolding. And it is very market sensitive.

Question: You were the first one to introduce the Hamiltonian term of fiscal compact and you urged the governments several times to agree to it, which they did. A few hours later the Spanish government said that they would not abide by the previous targets. After this, how confident are you that the fiscal compact will actually be implemented, or will it go the way of the Stability and Growth Pact?

Draghi: First, I am absolutely confident that the fiscal compact will be implemented. The reason for this is that there is a general sense, shared by all the countries and all their Heads of Government and Heads of State, that, in order to continue, the monetary union needs from all the countries the willingness to be subject to a discipline that cannot be changed by any government whatsoever – a discipline that is rooted in their primary legislation or in their constitutions. I think it is clear to everybody that, if countries do not give up some of their national sovereignty regarding fiscal policy, there is no way they can be together. Because there is no way that we can have a situation where one or two countries pay for everybody else. There is no way we can have a Union where you spend but then we issue bonds together, unless a discipline and rules are in place – and this is what the fiscal compact establishes. To use a term that is a little emphatic, but which I think gives the right idea, these rules are the “pillars of trust” between countries. This trust is essential for the monetary union. On the Spanish Government in particular, the European Commission has said that they have to have all the figures in place, because apparently there is a certain dialogue about ratios and figures and deficits-to-GDP ratios to be achieved by the end of 2012 and 2013. They will have those figures by the end of March or the beginning of April, and then they themselves will announce their opinion. I do not want to speak prematurely in this regard, but there are very strong political reasons behind my conviction that the fiscal compact will be put in place and will work.

Question: The overnight deposits of banks with the ECB have risen very much. Could you tell us if you are worried?

And second, the ECB was quite worried about a possible credit event after the PSI swap. Now I have the impression that the markets are less worried about the possible consequences. Can you tell us something about this please? Have things changed?

Draghi: On the first question, in a sense what is happening with the second LTRO is the same thing that happened with the first. It is a matter of the way the balance sheet of the central bank is constructed. This liquidity, once created, goes back on the liabilities side of the central bank. And, there, two things may happen: the deposit facility goes up, which is what you would expect in the shortest run, and then gradually the required reserves deposited with the ECB go up, if you have a credit expansion by the banks in the euro area. But it is going to take time. This is what should be expected. The question is, does it mean that this money does not go through the economy, but has just been re-deposited with the ECB? To respond to this question, we always look at the identity of the borrowers from the facility and the identity of the depositors. And they are different. This means that the money has been circulating in the economy before being re-deposited by other banks. So I would not make too much of the levels that these deposits are reaching, because it is just a mechanical consequence of the liquidity creation.

On the second point, I cannot answer because of the reasons I explained before. It seems that the two LTROs have removed the tail risk that was present. This tail risk was not necessarily a credit event in a specific country. It was more general. It was an environment of heightened risk aversion. And, on top of that, of course, you have the fragilities that exist in the euro area, including the one you mentioned. So we will have to look at the developments of today and tomorrow.

Question: Have you discussed any tightening of collateral rules, given that they cannot be any looser – or can they?

And there is virtually no question that interest rates for Germany are way too low, so what are you going to do when Germany is taking off and the other countries are not? Arguably, there could be something like a boom coming up in Germany and then interest rates for our country would be too low.

Draghi: We have not discussed tightening the collateral rules and they can be much looser. We had such a discussion about these additional credit claims, and it was vastly overblown. Just to give you an idea: the haircuts on these additional credit claims are very high – and they are meant to be very high – so as to make the riskiness of these additional credit claims about the same as the riskiness of the rest of the collateral, for which the haircuts are lower. The risk management of the ECB is actually quite careful and should be given credit for this I think. So it is not correct to say that the collateral rules could not be looser. But we did not discuss tightening the collateral rules.

The second point is very important. We have to have the monetary policy that is right for the whole of the euro area. And I think the monetary policy we have now is supportive of growth in all of the euro area. It is certainly accommodative as a stance, but it is in line with our primary objective of maintaining price stability in the medium term. So I do not share your forecast.

Question: I have two questions. The first one refers again to the Greek PSI deadline. Can you actually confirm that the ECB has concluded swapping its own holdings of Greek government bonds for bonds that are exempt from the collective action clauses? Could you explain why the ECB has made no formal statement on this up to now, bearing in mind that potentially taxpayers’ money may be at stake?

My second question is for you and Mr Constâncio. Certain segments in the markets are starting to concentrate on the second country that they now consider to be in need of a second bailout and a potential restructuring of government bonds, which is Portugal. Do you share those concerns? Do you think that this is a possibility?

Draghi: On the first point, I can answer by saying that the SMP was a monetary policy instrument. So the purchases of Greek bonds done under the SMP responded to public interest considerations, to general policy considerations, and as such they deserve protection. This is one reason. The other reason is that the balance sheet of the ECB should be protected because only through the integrity of the balance sheet of the ECB can you have ECB independence in pursuing price stability in the whole of the euro area. Price stability is in the interest of all the members. So I think that is one other reason why this exchange of bonds was the right thing to do. But there is a third reason, one that people rarely think about. We forget that this money is taxpayers’ money and so the ECB has in a sense the duty to do everything to protect the taxpayers’ money that was entrusted to it. This exchange of bonds was actually the right thing to do from this point of view as well. On Portugal, I will give the floor to Vítor, but let me say the second review of the Troika showed that both on the fiscal side and on the structural side the programme is marching according to the book. So it is in good order.

Constâncio: This is the essential point. The Troika just recently said in its review that the programme is on track and in line with all the targets that are in place. That is the essential point. The rest is market perception, but it is also true – and this is the only other point I am going to make – that the euro area authorities have said several times in very clear terms that there was a unique case where PSI applied and there won’t be other cases. So, with the programme on track I think everyone can expect that is what will happen.

Question: I have two questions. The first is on collateral – just details. There is this option for banks to create their own bank bonds, take a state guarantee and use them for collateral. Could you put a figure on that? How much is it used? And how much do banks use these additional credit claims? What is the amount? You said last month that the total amount is €600 billion, but how much is used for collateral? And for the second question, I would like to give the microphone to my colleague.

Question: You mentioned higher than expected commodity – and especially oil – prices as the primary reason for higher than expected inflation. Are you also bearing in mind the fact that some analysts argue that commodity prices are up because of loose monetary policy driving investment in the commodity markets? So, it’s not only exogenous reasons like the Iran conflict. Monetary policy is also pushing up commodity prices.

Draghi: On the first question, the government-guaranteed bonds are bank bonds which are guaranteed by the state, and the banks have to pay an extra fee to governments for this guarantee. The amount of these bonds pledged in Eurosystem monetary policy operations stood at around 160 billion euros after haircuts as of end February. On the other point, we have the amount used as collateral in the second operation: 53 billion euros of additional collateral from credit claims. And of this, I would say, roughly 40 billion euros was pledged by French banks that were basically already over-collateralised. The interesting thing about this is that, of the banks that actually used these credit claims – this new option of additional credit claims – most of them used it only to increase their collateral against their borrowing, so one cannot say that they actually borrowed more because of this new option. They simply increased their collateral for the future as a precaution. But they were already over-collateralised. So, this is interesting. The remaining 13 billion euros was spread across various countries. Here, again, there was one newspaper that wrote that Italy had taken 70 billion euros against these additional credit claims, when the figure was about 3 billion euros. I won’t tell you the name of the newspaper that wrote this, but I think they know who they are.

As regards the second question, that is another assertion that I have seen. Now, it was true in the past that one of the reasons for the high and rising commodity prices was the loose monetary policy conducted by a jurisdiction other than ours. But we are talking about a period of time when growth rates were much higher than they are today, when slack in the labour market was very, very limited, when output gaps were basically non‑existent. So, these tended to be periods of very strong growth. Now, in this current period, we are, unfortunately, in a situation where such inflationary consequences stemming from monetary policy are – well, I don’t think they are really relevant. In any event, our own monetary policy – and especially the two LTROs – cannot be blamed for the increase in commodity prices, because there is no correlation, in terms of timing, between the two events. The increase in prices started long before we undertook the two LTRO transactions.

Question: Just another question on the Anglo-Irish Bank promissory notes. Are you expecting that to come before the next Governing Council meeting on 22 March, or thereabouts? Do you think at that stage the Governing Council might be in a position to agree maybe some kind of a temporary measure for the end-of-March payment? Are you optimistic overall that there will be a successful resolution to the promissory notes issue?

And then secondly, on the issue of the Irish vote, what consequences do you think it will have for Ireland and for the euro zone as a whole if the referendum did fail?

Draghi: Well, you see, I have no answer to the first question because we are actually looking at this operation right now – the Governing Council and ECB staff are actually examining it.

On the second question, I don’t even want to think about it – as I said, I gave all the reasons why my confidence is grounded on a good economic and political analysis of the situation, and I just don’t want to think the opposite. I mean, it’s a fundamental piece of our Union now. As I said before, it is one of the pillars of trust.

Question: Volkswagen has said that it took some money via the LTRO. It has confirmed that they participated in the second LTRO and there have been reports that some other companies with financing arms have taken money. I am just wondering if you could first of all tell us what was the scale of that type of borrowing, and secondly, was it a desired result or was it an unintended consequence? How do you feel about that kind of borrowing?

Draghi: I don’t really have any reaction to that, but I don’t think they must be awfully relevant. The fact is that there are some companies that have very large treasury positions and have the status that allows them to access these facilities. So they are acting within the law.

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