BERLIN (MNI) – European Central Bank President Mario Draghi said
Monday that financial markets and the economy in the Eurozone seem to be
stabilizing at low levels.

“There are signs of stabilisation in both financial markets and
overall economic activity — albeit still at low levels,” Draghi said in
a speech at the annual reception of the German Banking Association (BDB)
here.

“Conditions in bank funding markets have improved,” the ECB
president noted. Banks in the Eurozone are meeting their new capital
requirements, he said.

“Bank lending is also stabilising,” Draghi said. “Banks are
starting to assess their financial situation more positively and in many
cases their willingness to make loans is increasing.”

The primary explanation for the improvement in sentiment over the
last few months has been the measures taken by the ECB, Draghi argued,
pointing to the two long-term refinancing operations.

“The LTROs were specifically designed to prevent a credit crunch
that could compromise the maintenance of price stability in the euro
area,” Draghi explained. “With funding markets closed, banks needed
liquidity assurance over the medium term to avoid pre-emptive
deleveraging and to continue lending.”

Draghi dismissed criticism that the liquidity created by the LTROs
will lead to inflation or asset price distortions.

“We would expect an impact on inflation and asset prices only
following a sustained and strong increase in money and credit — not
following an increase in central bank liquidity per se,” Draghi
elaborated.

“The tentative signs we are seeing of a stabilisation in money and
credit growth do not signal increasing inflationary pressures over the
medium term,” he argued.

“Market indicators of inflation expectations overall show no signs
of inflation above our medium-term objective,” Draghi said. “Market
expectations of long-term inflation are fully consistent with our
definition of medium-term price stability,” he added.

The Eurosystem has a range of tools at its disposal to absorb
excess liquidity if that is deemed necessary in the future, the central
banker pointed out.

“Moreover, our balance sheet has grown and shrunk in the past
without creating inflation — for example, this was evident over the
course of both 2009 and 2010,” Draghi noted.

“In other words, we are constantly alert to threats to medium-term
price stability. Euro area citizens can be certain that our objective is
delivering price stability over the medium term — and that we have all
the necessary tools to achieve it. The consistent strong anchoring of
inflation expectations confirms that our commitment is credible.”

Draghi again reasoned that imbalances within the Target2 payment
system are a symptom of real and financial imbalances between Eurozone
countries. “Restoring normality within Target2 requires not that we
address the symptom — the payment system — but that we address the
cause: the underlying imbalances,” he stressed.

Draghi also praised government action to tackle the debt crisis.
“There are positive developments in Italy and to some extent in Spain,”
he said.

“The latest review missions confirm that the Irish and Portuguese
programs are on track — with authorities in both countries strongly
committed to meeting their targets and with a solid track record,” he
remarked.

However, “the current stabilisation should not make us pause in our
responses to these challenges. Indeed, this is a time for continued
action,” Draghi emphasized.

“The present situation provides a window of opportunity for
governments to accelerate efforts to consolidate budgets, to boost
employment and to enhance competitiveness — and to do so with
confidence,” he reasoned.

–Berlin bureau: +49-30-22 62 05 80; email: twidder@marketnews.com

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