Draghi: ECB Strategy to Combat Debt Crisis is Working

European Central Bank President Mario Draghi says the central bank’s massive injection of cash into the financial system last month has begun to fulfill its purpose of calming debt markets.

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The ECB’s new three-year loan program has injected some much-needed liquidity into the European financial system, which has in turn invested in government bonds with the same maturities from troubled euro-zone sovereigns.

While “substantial downside risks” remain, there are “tentative signs” of economic stabilization in the euro area, Draghi said in Frankfurt on Thursday, pointing to the recess success of Italian and Spanish debt auctions this week that saw yields drop.

Draghi says the success of central bank’s recent efforts to lubricate seized credit markets has mitigated the need for further interest rate cuts in the short term, and has muted calls for the ECB to step up its government bond purchases.

Though the 17-nation euro region is not yet out of the woods after the debt crisis spread to Italy and Spain, the euro’s third- and fourth-largest economies, recent economic data suggests the worst of it may be over.

The ECB yesterday held its benchmark rate steady at a record low of 1 percent after two straight reductions. Asked if he would cut rates further, Draghi said it depends on the inflation outlook. For now, he says rates will remain low for an extended period.

“The monetary stance is and will remain accommodative,” Draghi said. “Uncertainty is very high. We will monitor all developments and stand ready to act.”

“There are tentative signs of stabilization of economic activity at low levels,” Draghi said, which will likely stay the ECB’s hand, at least for the time being.

For now, the ECB does not seem to be contemplating any further measures to tackle tensions in sovereign debt markets, said Holger Schmieding, chief economist at Berenberg Bank in London.

Draghi says he expects “substantial demand” for a second batch of three-year loans that will be distributed February 29. Banks will be able to borrow as much as they like against collateral, he added, and furthermore, the ECB has widened the pool of assets that can be used as collateral.

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