Draghi sees no sign of bond shortage for ECB debt buying

Frankfurt

MARIO Draghi pushed back against concerns that the European Central Bank's quantitative easing (QE) plan will be hampered by a shortage of bonds available to buy.

"We see no signs that there will not be enough bonds for us to purchase," the ECB president said at a hearing on Monday at the European Parliament in Brussels. "Feedback from market participants so far suggests that implementation has been very smooth and that market liquidity remains ample."

The Frankurt-based central bank started buying government debt this month to revive inflation. While the region's recovery is being helped by cheap oil and a weak euro.

Mr Draghi is faced with a resumption of the crisis in Greece, with the country on the verge of a default that would shake the foundations of the single currency. The ECB plans to buy 60 billion euros (S$90 billion) a month of public sector debt in a bid to revive falling prices in the euro area. The programme is slated to last until September 2016, or until inflation is back on track towards the central bank's goal of just under 2 per cent. "Lower interest rates in capital markets are increasingly being transmitted through the entire financial intermediation chain," Mr Draghi said. "Lower funding costs for banks have started to influence the cost of borrowing for households and companies. As bank lending rates are being reduced, new investment projects - previously considered unprofitable - become attractive."

The ECB president said that QE will be a decisive driver of the euro area's accelerating recovery. "The most recent data and survey evidence show that growth is gaining momentum," he told lawmakers. "A key factor for a full recovery of the euro area economy and ensuring that inflation does not remain too low for too long will be the extra stimulus."

Mr Draghi has been increasingly upbeat about the euro area revival since the announcement of the QE programme. "We can rightly be optimistic about the outlook," he said on March 16, two weeks after ECB staff forecast growth will accelerate from 0.9 per cent last year to 2.1 per cent in 2017 - a pace of expansion the region hasn't seen since 2007.

Data this week may bolster his case. On Monday, consumer confidence in the currency bloc will rise to the highest level in 7.5 years, according to a Bloomberg News survey, as cheaper oil pushes down prices and boosts spending. A day later, purchasing managers indexes will show manufacturing and services activity expanding across the region.

Business confidence in Europe's largest economy, as measured by the Ifo institute, is slated to increase for a fifth straight month, according to a separate survey before data on Wednesday. Italy will report industrial orders and retail sales on Friday.

The ECB has already revised up its economic outlook. Provided monetary stimulus is implemented in full, growth will accelerate from 0.9 per cent last year to 2.1 per cent in 2017 - a pace of expansion the region hasn't seen since 2007.

In a sign that euro-area banks share policy makers' optimism, they took out 98 billion euros of the ECB's long-term loans last week, more than twice the amount forecast. Analysts say the unexpectedly high interest reflects banks' expectations that credit demand is picking up. Data on Thursday may show lending to companies and households increased in February for the first time since 2012.

As the economic outlook brightens, politics remain fraught with risks.

Greece is on the verge of running out of cash as bailout negotiations with European creditors drag on. Amid concern about endangering political progress, the ECB rejected a proposal by its supervisory arm to prohibit Greek banks from increasing their holdings of short-term government debt.

Mr Draghi will also address the Italian parliament this week, where lawmakers are looking to discuss topics including the country's failure to return to growth and stubbornly high unemployment.

In his home country, as in France and elsewhere across the continent, support for parties of different stripes calling for a breakup of the euro and a return to national currencies is on the rise. Mr Draghi witnessed some of the discontent behind this surge in his own backyard on March 18, when protesters set cars on fire and hurled stones at police during the official inauguration of the ECB's new premises.

While Mr Draghi took note of protesters' demands and motives, he said that neither retrenching behind national borders nor demanding unconditional European solidarity are viable solutions. Instead, he urged governments to make use of improved economic prospects and carry through with reforms. BLOOMBERG