Draghi quashes ECB exit talk

His remark comes even as Spain struggles to borrow in financial markets

FRANKFURT: European Central Bank (ECB) president mario draghi quashed talk of an early exit from emergency stimulus measures as Spain struggled to borrow in financial markets, a reminder of the risk that the region’s debt crisis could flare again.

Speaking just hours after Spanish Prime Minister Mariano Rajoy warned his country faces “extreme difficulty,” Draghi said on wednesday that talk of the ECB starting to withdraw its support for euro-area banks was “premature”.

At the same time, in a nod to growing inflation concerns in Germany, he said the ECB would not hesitate to counter price risks if needed.

Policymakers left their benchmark rate at a record low 1%.

The ECB has expanded its balance sheet by about 30% since Draghi took office in November, pumping more than one trillion euros (US$1.3 trillion) into the banking system in a bid to stem the debt crisis. Pressure to unwind the emergency measures is rising in Germany, where workers are winning some of the biggest pay increases in two decades, threatening to stoke inflation.

“Premature Bundesbank calls for an ECB exit strategy have now triggered a new round of market wobbles, with a focus on Spain,” said Holger Schmieding, chief economist at Berenberg Bank in London. “The risk of a new irrational market panic remains serious.”

While the ECB’S three-year loans to banks have helped ease tensions on financial markets, lowering borrowing costs for debt-strapped governments, bond yields are rising again in Spain.

The euro-area’s fourth largest economy sold 2.59 billion euros of bonds on Wednesday, just covering the minimum amount targeted. After the auction, yields on the country’s 10-year bonds surged to more than 5.6%, the highest in three months.

“Spain is facing an economic situation of extreme difficulty, I repeat, of extreme difficulty, and anyone who doesn’t understand that is fooling themselves,” Rajoy told a meeting of his People’s Party as he sought to push through the deepest budget cuts in three decades.

Declining to comment directly on the Spanish auction, Draghi said governments must make use of the window of opportunity created by the ECB’S emergency measures to deliver on promised structural reforms and fiscal consolidation.

Draghi faces pressure from some ECB policymakers to start planning an exit as higher energy costs keep euro-area inflation above the central bank’s 2% limit and price pressures brew in Germany.

Two million public service workers in Europe’s largest economy will get a pay increase of 6.3% by the end of next year under a deal struck with the government, according to the Ver.di union. IG Metall, Europe’s biggest labour union with about 3.6 million workers, is demanding 6.5% more pay.

The ECB hardened its tone on inflation in Wednesday’s policy statement, saying “all the necessary tools are available to address upside risks to price stability in a firm and timely manner” and that it would pay “particular attention to any signs of pass through from energy prices to wages”.

Still, Draghi said the economic outlook was subject to downside risks and inflation would remain contained in the medium term.