Economic recovery is slowing, but banks’ confidence in SMEs is up, says Draghi
Economic recovery is losing momentum; European Central Bank President Mario Draghi told the Economic and Monetary Affairs Committee on Monday, citing slowing growth in the second quarter and less than encouraging economic indicators in the summer. "The weak credit curb, high unemployment, political and geopolitical tensions could work against the necessary confidence the ECB is trying to build", he explained.
In his regular monetary dialogue meeting with MEPs, Mr Draghi underlined the need for a common monetary policy stance and to create favourable conditions for money to reach the real economy. "Our measures are aimed at lowering interest rates for the private sector and 80% of its financing goes through banks". Mr Draghi repeated that fiscal and monetary stimulus can have a lasting impact only if accompanied by structural reforms and increased competitiveness. "The real economy needs money, but we need firms to take risks and create jobs".
Addressing MEPs’ fears about the recently-agreed Long-term Refinancing Operations (LTRO's) not reaching the real economy, he said that this time, the banks will have to lend money according to established bench marks. "If they don't, they will have to pay it back within two years".
On the ECB's programme to purchase Asset-Backed Securities (ABS), Mr Draghi made it clear that the ECB is not buying just anything: "This is to complement refinancing operations. These packages are simple, transparent and backed by real loans". He also drew a distinction between the US Federal Reserve's Programme and that of the ECB: "The default rate for residential ABSs is much lower in the euro area (0.12%) than in the US (almost 20%). Our exposure to risk is limited. Besides, ABSs are already a big part of the collateral banks use to borrow from the ECB", he said.
Replying to concerns that the ECB’s recent decisions appeared to have had little impact, Mr Draghi acknowledged that "we have a demand problem", but added that "when the demand picks up, we have to be ready". He also disagreed with a remark about the ECB "doing nothing to help national budgets". "Look at the savings countries made thanks to the ECB's monetary decisions. Where have those gone?", he asked.
Mr Draghi also argued that banks’ confidence of banks in Small and Medium-sized Enterprises (SMEs) was returning: "Risk aversion - there is no doubt - is higher for bank lending to SMEs as compared to corporate businesses. SMEs are less well capitalised and don't forget that in certain countries whole sectors have disappeared, for example construction. This difference in rates was always there, but the spread is now lower than before".