BRUSSELS (MNI) – The European Central Bank’s next move will
probably need to be creative, but the guardian of price and financial
stability in the Eurozone can afford to take its time because
governments have yet to respond to its last move.

Speaking at the ECB’s monthly press conference Thursday, the bank’s
President Mario Draghi said repeatedly that after having come up with a
“full and effective backstop” to help troubled countries in the form of
the Outright Monetary Transaction (OMT) programme, it was now up to
governments to make the next move and decide whether or not they wanted
to avail themselves of it.

“At this point it is really up to the governments to decide what
they want to do,” Draghi said. “The ECB has done what really was
possible.”

He later said, “governments will have to persevere in their reform
action on all fronts – fiscal, structural, banking, financial market
sector,” adding that “the ECB cannot replace the action of governments.”

Draghi stressed as he did last month that conditionality was an
essential prerequisite for the ECB’s OMT programme. But instead of
emphasizing the words “strict and effective,” as he had on previous
occasions, he chose this time to note out that the conditions “need not
necessarily be punitive.”

He also said that ultimately the particular conditions for
assistance were up to Eurozone governments to decide – a statement that
may have been designed to reassure a hesistant Spain that the ECB would
not necessarily push for tougher reforms and targets should Madrid seek
aid from the Eurozone’s bailout funds.

Asked whether the policies that Spain has already committed to meet
were sufficient, Draghi said that “it is up to the Spanish government to
decide.”

The ECB chief was clearly suggesting that he and his colleagues
stand ready with a bazooka at hand but that governments need to clear
the way before it can be fired.

Draghi also took a tough line on the idea of extending the
maturities of Greek governments bonds held by the ECB, effectively
ruling it out by saying that “yes, it would constitute monetary
financing.”

While Draghi was clear that the ECB’s biggest weapon still had the
safety catch on, his remarks, spoken and unspoken, also suggested that
the central bank was holding back on other tools too.

Draghi avoided any hint of a suggestion that the ECB was preparing
to establish new non-standard measures soon. And he revealed that the
Governing Council had not even discussed the possibility of using
standard monetary policy by cutting rates.

The ECB is not focusing on rates because severe financial
fragmentation across the Eurozone means that standard measures simply
aren’t working.

“Non-standard monetary policy measures are being designed and
implemented when the standard ones are not fully effective, otherwise we
would stay with the standard monetary policy measures,” Draghi said. “We
have to see if we can repair the monetary policy transmission channels.”

The ECB chief revealed in more detail than ever before the depth of
the ECB’s concern that the interest rates it sets are not having their
desired impact across the Eurozone.

When two subsidiaries of the same company in different countries
pay completely different rates to borrow, or couples in one country have
a much higher mortgage than in another country, “then you start asking
yourself if maybe there is a problem here,” Draghi said.

He noted that big spreads between EMU states reflect a “profound
lack of liquidity in some markets,” and that under the current crisis
circumstances, “the exchange rate appreciates when the interest rates go
down and vice versa.” At that point, “you say you have a possible
unacceptable level of fragmentation in the euro area.”

Asked what criteria the ECB would weigh if it uses its OMT
programme to repair the monetary policy transmission channel, Draghi
said that a range of factors including bid/ask spreads, liquidity, the
shape of yield curves, and volatility, all “inform our monetary policy
assessment.”

–Brussels Newsroom, +324-952-28374; pkoh@mni-news.com

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