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E.C.B. Chief Says Cyprus Shows Commitment to Euro E.C.B. Chief Says Cyprus Shows Commitment to Euro
(about 4 hours later)
FRANKFURT — The head of the European Central Bank said Thursday that the recent bailout of Cyprus showed the bank’s determination to shore up the euro, though he acknowledged that an initial decision to impose a tax on small bank deposits was “not smart, to say the least.” FRANKFURT — The head of the European Central Bank on Thursday attempted to pick up the pieces left by the crisis in Cyprus, emphasizing the bank’s determination to shore up the euro, acknowledging clumsy policy making, and insisting that the troubled island nation provided “no template” for the future.
Mario Draghi, president of the E.C.B., also noted during a press conference in Frankfurt that the error of the bank deposit tax was quickly corrected, and that Cyprus was “no template” for future crises. “Cyprus is no turning point in euro policy,” Mario Draghi, president of the E.C.B., said at a news conference. And he rejected suggestions that Cyprus or any other country might leave the euro, or be better off if it did.
He emphasized the E.C.B.’s willingness to take action in response to threats to euro zone stability. “If anything, the events on Cyprus have reinforced the Governing Council’s determination to support the euro while maintaining price stability and acting within our mandate,” he said. There is “no Plan B,” Mr. Draghi said.
The muted market reaction to events in Cyprus showed that “we are now in a position to cope with serious crises without them becoming existential or systemic,” he said. Nor is there, for now at least, a Plan B even for the European Union’s bigger, but moribund, economies. Survey data published Thursday showed a further slide in business confidence on the Continent.
Mr. Draghi spoke at a press conference after the bank’s Governing Council left its benchmark interest rate unchanged at 0.75 percent, a record low, as expected. The E.C.B. left its benchmark interest rate unchanged Thursday at 0.75 percent, while the Bank of England held its rate steady at 0.5 percent. With both central banks’ rates already at record lows, there might be little room to use interest rates as a stimulus. But the euro zone economies, like that of Britain, are stagnant and in need of help wherever they can find it.
The Bank of England also kept its benchmark interest rate unchanged on Thursday amid concern that the British economy fell back into recession at the beginning of the year. Mr. Draghi said the E.C.B. was looking for new ways to stimulate lending in the weak euro zone economy, and could move quickly. It was unclear, though, what options might be available.
The Bank of England, the central bank, decided to leave its main interest rate at the record low of 0.5 percent, where it has been since March 2009. It also held its program of bond buying, a way to stimulate the economy, at £375 billion, or about $568 billion. “We will assess all the data in coming weeks and we stand ready to act,” he said, without offering many clues about what measures he might have in mind.
In Europe, Mr. Draghi has faced pressure to reassure financial markets that he will not let the banking crisis in Cyprus threaten the euro zone’s stability. The global financial crisis in recent years has forced central banks around the world to do much more than simply tweak the official interest rate as they had in the past. On Thursday, Haruhiko Kuroda, the new governor of the Bank of Japan, announced that it would seek to double over two years the amount of money in circulation, initiating a bid to end years of falling prices.
Since Mr. Draghi’s last press conference a month ago, the second-largest bank in Cyprus has been shut down, wealthy depositors in Cypriot banks have been required to take huge losses on their holdings, and the country has imposed restrictions on large transfers of money to prevent a flight of capital. But the E.C.B., with its mandate to defend price stability above all else, is more constrained than its counterparts in other developed nations.
The E.C.B. was a key player in the events, in effect threatening to withdraw support for Cypriot banks unless local political leaders agreed to a bailout plan that would shift some of the cost to rich depositors, many of them Russians. During the past year, Mr. Draghi has managed to quiet financial markets, cap government borrowing costs and contain the euro zone crisis by making it clear that the E.C.B. would not allow the 17-country euro currency union to unravel. He repeated those reassurances Thursday. But it is not clear what tools he sees at his disposal.
The turmoil in Cyprus has begun to blunt business confidence in the euro zone, threatening an already shaky recovery. Data from Markit, a research firm, confirmed on Thursday that sentiment continued to worsen, as a survey of business activity showed a marked drop in France and a stalling of growth in Germany, the largest and most robust euro zone economy. Making sure that “credit will flow to the real economy seems to be the E.C.B.’s number one priority,” Carsten Brzeski, an economist at ING Bank, wrote in a note to investors. “However, judging from today’s press conference, the E.C.B. looks rather clueless on how to tackle the problem.”
The index fell to 46.4 in March from 47.9 in February, and was slightly lower than a preliminary reading of 46.5 two weeks ago, Markit said. The index has been below 50, the level that separates contraction from growth, in all but one of the 20 previous months. Mr. Draghi said there was a consensus among the 23 members of the central bank’s Governing Council not to cut rates even lower “for the time being.” The bank also discussed other, unconventional ways to help countries where credit remains tight, he said.
The figure for France was 41.3 in March from 43.7 in February. The March figure was the lowest reading since February 2009. “We will continue to think about this issue in a 360-degrees way,” Mr. Draghi said. “The experiences of other countries tell us we have to think deeply before we can come up with something useful and consistent within our mandate.”
Germany’s economy, while still nominally growing, slowed to a crawl in March, with the index falling to 50.6 from 53.3 in February. Large-scale purchases of corporate debt, which have been used by the Federal Reserve to stimulate lending in the United States, would be more difficult in Europe because most companies get their credit directly from banks, Mr. Draghi indicated.
In keeping with the bank’s mandate to ensure price stability in the 17 members of the euro zone, Mr. Draghi said that in coming weeks the E.C.B. would closely monitor the outlook for prices. With inflation already below the E.C.B.’s target of about 2 percent, some analysts have worried that, like Japan, the euro zone also faces a risk of deflation — a broad decline in prices that can be more destructive and difficult to cure than inflation. Mr. Draghi said, however, that risks to price stability were “broadly balanced,” indicating that he did not yet see a major risk of deflation.
With inflation already below the E.C.B.’s target of about 2 percent, the statement could be interpreted as a sign that policy makers were more open to cutting rates in order to prevent deflation, a broad decline in prices that can be more destructive than inflation. Mr. Draghi found himself devoting much of the hourlong news conference trying to dispel fears that Cyprus represented an ominous new phase of the euro zone crisis.
Mr. Draghi also said, however, that risks to price stability were “broadly balanced.” He is under pressure to reassure investors and euro zone citizens that the E.C.B. will act to prevent an exodus of deposits from other weak countries, like Italy or Spain. A bank run in those countries would pose a more serious threat to the euro than tiny Cyprus. He acknowledged that an initial decision by officials from the European Union, the International Monetary Fund and the E.C.B. to impose a tax on small bank deposits was “not smart, to say the least.” But he pointed out that euro zone officials quickly corrected that error.
There are limits, however, to what the E.C.B. can do without violating its mandate. The E.C.B. can supply banks with cheap loans, but it cannot offer cash to replenish depleted bank reserves. At the same time, he defended the decision that did stick: to place much of the burden of bailing out Cyprus banks on large depositors. In a lengthy discourse on the lessons of Cyprus, he said it showed the need for centralized banking supervision that would enable regulators to detect problems before they become a broader threat.
While European leaders have agreed to give the E.C.B. power to oversee euro zone banks, they remain divided on measures to protect bank depositors and to deal with failed financial institutions.While European leaders have agreed to give the E.C.B. power to oversee euro zone banks, they remain divided on measures to protect bank depositors and to deal with failed financial institutions.
Events in Cyprus, which were unprecedented in the euro zone, have added urgency to the debate about a banking union. Mr. Draghi warned that countries where banking risk was several times larger than the economy — a group that includes Cyprus, Britain and Luxembourg — were especially vulnerable. Those countries have to be more conservative, he said, avoiding large budget deficits and ensuring that the banks have ample capital buffers. German officials, in particular, have been critical of the Cypriots for running what Berlin has said was an unsustainable financial system.
“The ongoing busting of euro area taboos makes it more urgent to deliver economic recovery, as well as to accelerate banking union,” analysts at Barclays Capital wrote in a note before the E.C.B.’s meeting. But Mr. Draghi also stressed the E.C.B.’s willingness to take action in response to threats to euro zone stability.
Jack Ewing reported from New York and Julia Werdigier contributed from London. “If anything, the events on Cyprus have reinforced the Governing Council’s determination to support the euro while maintaining price stability and acting within our mandate,” he said. The muted market reaction to events in Cyprus, he said, showed that “we are now in a position to cope with serious crises without them becoming existential or systemic.”
He said no country in the euro zone would be better off leaving the euro, as some commentators have suggested. “What was wrong with Cypriot economy doesn’t stop being wrong if they are outside of the euro,” Mr. Draghi said. “An exit entails many risks — big risks.”
The turmoil in the country has begun to blunt business confidence in the euro zone, threatening a recovery that was already shaky.
Data from Markit, a research concern, confirmed the continued downturn on Thursday, as a survey of business activity showed a marked drop in France and a stalling of growth in Germany, the largest and most robust economy in the euro zone.
Mr. Draghi predicted that the euro zone would recover, but sounded slightly less confident than in the past. “Tight credit conditions,” he said, “will continue to weigh on economic activity.”
In London, the Bank of England’s decision to keep the benchmark interest rate unchanged on Thursday took place despite concern that new data may show that the British economy fell back into recession at the beginning of the year.
The British central bank decided to leave its interest rate at the record low of 0.5 percent, where it has been since March 2009.
The governor of the Bank of England, Mervyn A. King, has been pushing this year for increased fiscal stimulus to help the economy grow, but has been overruled by other members of the central bank’s interest rate setting committee. Mr. King is to be succeeded in three months by Mark J. Carney, governor of the Bank of Canada.
Jack Ewing reported from New York. Julia Werdigier reported from London.