Draghi concerned over euro


European Central Bank (ECB) president Mario Draghi signalled on Thursday that policy makers were concerned the euro’s advance could hamper an economic recovery.

“The exchange rate is not a policy target, but it is important for growth and price stability,” Mr Draghi said in Frankfurt after the ECB kept its benchmark rate at a record low of 0.75%. “We want to see if the appreciation is sustained, and if it alters our assessment of the risks to price stability.”

While latest data show the 17-nation eurozone economy is starting to stabilise after the sovereign debt crisis drove it into recession last year, the currency’s gains could hurt exports and slow the recovery.

Mr Draghi stressed that ECB policy remains accommodative, and said low rates should help to fuel growth later this year. But risks to the economic outlook remained on the downside, he said.

“The market is reading the comments as generally downbeat,” said Adam Cole, head of global foreign-exchange strategy at Royal Bank of Canada in London. “That and the comments about the risks to inflation have pushed the euro down.”

The euro fell 0.7% to $1.3421, with the session low at $1.3419.

A strong currency may stifle Europe’s exports and hurt an economy still suffering from the tough austerity measures imposed by governments to bring down debt. Several European leaders, notably French President Francois Hollande, have complained about the euro’s level. But Germany said the currency was not overvalued.

Mr Draghi maintained his view from last month that the eurozone’s weakness was “expected to prevail in the early part of 2013”. Activity should gradually recover in the second half. He said the move by banks this month to pay back early about €140bn of cheap three-year money the ECB loaned last year was positive. The ECB would watch to see if the money market tightened conditions by stealth, he said.

He declined to be drawn on reports on Thursday that the ECB and Ireland had reached a compromise on a long-standing dispute over the cost of servicing money borrowed for Anglo Irish Bank. He said only that the ECB “took note of the Irish operation”, and referred questions to the Irish government.

Legislators in Dublin rushed through emergency legislation early on Thursday to liquidate failed Anglo Irish Bank, which was renamed Irish Bank Resolution Corporation in 2011, as part of a compromise to avoid paying €3.1bn a year until 2023 on money it took for the stricken lender in 2008. Eamon Gilmore, Ireland’s deputy prime minister, had called Anglo Irish the worst lender in the world as loan losses led to a €30bn bail-out.

Mr Draghi was also pressed about how much he knew of the derivatives scandal at Siena’s Monte dei Paschi bank, and what he did about it when he headed Italy’s central bank from 2006 to 2011.

Italy’s third-largest and oldest bank has been at the centre of a financial and political storm, facing losses of about €1bn from a series of derivatives and structured finance trades and after a €9bn acquisition of smaller rival Antonveneta, which left it badly weakened.

Mr Draghi said there was no implication for the ECB’s future role as a European bank regulator. “The International Monetary Fund has publicly stated that their preliminary view is that the Bank of Italy took timely and appropriate action within the limits of legal framework to address problems at (Monte dei Paschi),” he said.

A senior Italian central bank said Mr Draghi was informed of doubts raised by Bank of Italy inspectors but had little control over what has been widely criticised as ineffective oversight of the stricken lender.

Former Italian economy minister Giulio Tremonti said it was “stupefying” that in his role as supervisor of Italy’s banking system Mr Draghi failed to discover or prevent loss-making derivatives trades at Monte dei Paschi.