PARIS (MBI) – The European Central Bank’s recent rate cut and its
announcement of additional liquidity measures were designed to counter
“strong headwinds” in the economy generated by bank deleveraging, ECB
President Mario Draghi said Thursday.

Speaking in Berlin, Draghi said funding problems at European banks
were slowing the flow of credit to the Eurozone economy, adding to
market tensions that have already weakened growth.

Banks are “facing problems in raising longer-term funding in
financial markets,” Draghi said. “The resulting shortening of their
funding leads in turn to maturity mismatches on balance sheets of the
kind that caused the financial crisis.”

Draghi said the banking problems are also damaging the monetary
policy channel by which the ECB’s rate decisions are translated into
easier credit conditions in the real economy.

“In the present conditions, this process turns out to be hampered,
so that the impact of a rate cut by itself is weakened,” Draghi said.
“Banks limit their lending to other banks and potentially to the broader
economy, and they hold on to precautionary balances of cash as
self-insurance.”

Draghi said the ECB’s decision to offer refinancing operations with
a maturity of three years, its decisions to accept bank loans as
collateral and its move to reduce the required reserve ratio from 2% to
1%, were all designed to address the tight credit conditions in the
banking system.

That package of measures, he said, “should be felt tangibly in the
financial sector and the real economy over the coming weeks and months.”

Regarding the recent European Union summit, Draghi said that the
decisions to create a fiscal compact with clear rules and automatic
sanctions were “capable of making public finances in the euro area
credibly robust.”

He said that together with recent “six-pack” economic governance
rules recently approved by the European Parliament, the Brussels
decisions of last week were “a breakthrough for clear fiscal rules in
our monetary union.”

But he added that “the crisis has not ended yet. It is now
important not to lose momentum and to swiftly implement all those
decisions that have been taken to put the euro area economy back on
course.”

–Paris Newsroom, +331-42-71-55-40; jduffy@marketnews.com

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