How Will Draghi Handle These Pressing Questions?

Mario Draghi faces a tough agenda in upcoming weeks: he will be questioned over both the European Central Bank’s sensitivity to increases in the euro and his connection to a banking scandal that dates back to when he was chief of Italy’s central bank.

This week, Draghi and the ECB decided to keep the main interest rate at 0.75 percent, in line with the expectations of economists polled by Reuters, who last week said that the bank would not adjust rates until at least July 2014.

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All the issues confronting the bank’s president will likely come up in Thursday’s news conference, at which time he is expected discuss the ECB’s monetary policy, confirm a compromise with Ireland over a long-standing dispute over money servicing costs, and be grilled about his involvement in the derivatives scandal at Siena’s Monte dei Paschi bank.

The ECB’s euro policy will draw particular attention from investors, who want to know how much more the euro must increase before its strength forces the central bank to cut its rate. Citigroup economist Juergen Michels believes that the ECB will take a cautious tone in the conference. “Recent data has not been exclusively positive,” he told Reuters. “And since the last policy meeting, the euro exchange rate has gone up, as have short-term money market rates, which the ECB cannot ignore completely.” The euro reached a 15-month high of $1.3711 on February 1.
But economic indicators are beginning to show that the euro-zone debt crisis is beginning to improve, stated the publication, which should make the questioning easier for him to handle.

While ECB Governing Council member Erkki Liikanen told the publication that there was no chance that the bank would reverse its policy, some European leaders are hoping that will change. French President Francois Hollande said Tuesday that the euro zone must decide upon an exchange rate policy to protect the currency from “irrational movements”.

Ireland will also be discussed in the interview; the nation pushed through legislation on Thursday to dissolve the failed Anglo Irish Bank as part of an agreement Ireland made with the ECB to avoid paying 3.1 billion euros per year for the next 15 years on money it was lent to avoid a banking crisis in 2008.

What could potentially be more difficult for Draghi to explain is why he failed to discover or prevent the 1-billion-euro derivative trading loss at Italy’s third-largest and oldest bank that at occurred when he was the head of the Bank of Italy from 2006 to 2011. Draghi’s news conference will give reporters their first opportunity to question him regarding this incident.

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