–Adds Comments On Italian Banks, Lending Standards, Capital Increases

PARIS (MNI) – Eurozone economic activity is “very moderate,”
dampened by slowing world demand, a drop in consumer and business
confidence, as well as the sovereign debt crisis, European Central Bank
Governing Council member Mario Draghi said Wednesday.

Draghi, who will become the new ECB president next week, warned
that the growth picture in the single currency area has darkened. “The
risks of a weakening of growth prospects are significant, in the context
of strong uncertainty,” he said in the text of a speech for delivery at
the annual “Savings Day” conference in Rome.

With respect to Italy, whose central bank he heads for six more
days, Draghi noted that the “particular vulnerability” is the high level
of public debt, as well as “doubts about the growth outlook for our
economy, uncertainty, and delays in correcting imbalances and
implementing measures to relaunch growth.”

He noted that, given these tensions, yields on Italy’s sovereign
10-year bonds had spiked to 5.9% on Tuesday, returning to the “very high
levels” seen in August.

Draghi said that the ECB and national Eurosystem central banks were
“determined, with their non-conventional measures, to prevent
malfunctioning in money and financial markets from impeding the
transmission” of monetary policy.

“With the ample provision of funds and the mode of adjudication
[ie, full allotment at fixed rates] in our refinancing operations, we
continue to assure that banks are not constrained with regard to
liquidity,” the soon-to-be ECB president said.

He added that, “all non-conventional measures adopted in response
to the financial tensions are, by their nature, temporary. It remains
essential to assure price stability, anchoring inflation expectations in
the euro area in line with the objective of maintaining inflation below
but close to 2% over the medium term.”

However, Draghi noted that ECB interventions in the crisis can only
impede an aggravation of imbalances. Alone, they cannot solve the root
problem. It is “urgent” to have governance rules “in which budget
discipline and solidarity find reciprocal support.”

In addition, he urged an “immediate implementation of financial
support tools for managing the crisis” — a clear appeal to political
leaders meeting in Brussels later today to announce a detailed plan.

“But without a resolute and durable response emanating from
adequate national policies, which removes fiscal imbalances while
promoting growth,” any crisis-fighting tools will be only a
“palliative,” he said.

Closer to home, Draghi noted that Italian banks had always
responded favorably when asked to reinforce their capital buffers.
“Their response up to now has been prompt, and we trust that will also
be the case in the future,” he said.

He added that Italian banks have only “modest” exposure to the
peripheral countries of Greece, Ireland, Portugal and Spain, equal to
about 1% of the national banking sector’s total activity. However,
Italy’s banks do have “significant investment” in Italian public debt,
he said.

He noted that recent surveys show a stiffening of bank lending
standards and “growing difficulty” in credit access.

Draghi said that at a European level, the governments’ request that
banks increase their capital buffers is “necessary to confront the
current worries of investors,” and will ease access to liquidity.

–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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