ECB’s Draghi Defends Policy Toward Greece

Draghi Says ECB Is Willing to Accept Greek Bonds as Loan Collateral If Athens Sticks to Pledges

By TODD BUELL And  BRIAN BLACKSTONE

Updated Feb. 25, 2015 4:13 p.m. ET

The Wall Street Journal

FRANKFURT—European Central Bank President Mario Draghi defended the ECB against criticism that it acted in a heavy-handed way toward Greece during the country’s bailout negotiations with creditors, saying the central bank was simply applying its lending rules.

In at times combative testimony to the European Parliament in Brussels on Wednesday, Mr. Draghi said it was up to governments to initiate economic overhauls to boost the region’s growth prospects. He hit back at “popular mistakes” he said some lawmakers have made in judging the ECB’s policies toward Greece. He added that the central bank was ready to reinstate a waiver on Greek bonds for use as collateral for cheap ECB loans once it was convinced Greece was on track to successfully complete its bailout program.

Earlier this month—as Greece remained in a standoff with its European lenders—the ECB said it would no longer accept junk-rated Greek government debt as collateral for regular central bank loans, dealing a blow to the new leftist government’s attempts to rewrite the terms of its bailout.

Mr. Draghi’s voice rose at times as he defended the ECB’s policies. During the hearing, some parliamentarians criticized the central bank’s monetary policies and its approach to Greece as too lenient toward banks and undemocratic. Mr. Draghi left the hearing, which included other top European officials, before it was over—which also drew the disapproval of some lawmakers in attendance.

“You seem to give a lot of responsibilities to the ECB,” Mr. Draghi said. “Can monetary policy produce growth by itself? The answer is no.”

His remarks came one day after the ECB president told eurozone finance ministers that Greece’s reform proposals, submitted late Monday, served as a good starting point for discussing a continuation of the country’s bailout.

But in a letter to eurozone finance ministers this week, Mr. Draghi expressed concern that the proposals that Greek authorities presented to secure a bailout extension differed from their existing program commitments.

“In such cases, we will have to assess during the review whether measures which are not accepted by the authorities are replaced with measures of equal or better quality in terms of achieving the objectives of the program,” he wrote.

On Tuesday, eurozone finance ministers approved an extension of Greece’s €240 billion ($273 billion) rescue package until the end of June. Some national parliaments still need to approve the deal.

Mr. Draghi also said Wednesday that the ECB’s latest stimulus program involving more than €1 trillion in purchases of government bonds and other public and private debt should help boost the eurozone’s economy and raise inflation toward the central bank’s target rate of just under 2%.

“As in the case of the existing purchases of private-sector securities, the purchases of public securities have a high transmission potential to the real economy,” Mr. Draghi said in his prepared testimony to the European Parliament. “They will further support a broad-based easing of financial conditions in the euro area, including those relevant for the borrowing conditions of euro-area firms and households.”

The central bank announced in January that it would begin large-scale purchases of mostly government bonds—a policy known as quantitative easing—which are due to start next month.

The ECB will buy €60 billion in securities a month until September of next year. Inflation in January was at negative 0.6%, official data confirmed Tuesday.

“For several quarters now, inflation in the euro area has been on a continuous downward trend,” Mr. Draghi said. “At the same time, in January 2015, market participants were expecting inflation to return to levels closer to our policy aim only over a horizon which stretched well beyond any meaningful definition of medium term.”

A recently released account of the ECB’s Jan. 22 meeting showed that concerns about the risk of crippling consumer-price declines prompted the Governing Council to launch its unprecedented quantitative-easing program.

The region faced “the risk of too prolonged a period of too-low inflation,” the ECB said in the account. “This, in turn, raised the possibility of deflationary forces setting in, which would not permit an attitude of ‘benign neglect,’” it said in its first published account of a meeting.

Economists worry that a prolonged period of falling prices, known as deflation, would result in consumers putting off purchases, exerting downward pressure on corporate earnings, economic output and eventually wages. Deflation can also raise the cost of debt in inflation-adjusted terms, thus placing more of a burden on debt-strapped governments and consumers.

Write to Todd Buell at todd.buell@wsj.com and Brian Blackstone at brian.blackstone@wsj.com

http://www.wsj.com/articles/ecbs-latest-stimulus-should-help-boost-eurozone-draghi-says-1424888963