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Draghi: Cramped credit hurting recovery

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SINTRA, Portugal (AP) — European Central Bank President Mario Draghi said the bank needed to be on its guard against a “negative spiral” of low inflation that could drag down the economy – and it could engage in large-scale bond purchases to combat that if need be.

Draghi’s remarks at a conference in Sintra, Portugal, held out the prospect for action to stimulate the weak recovery at the ECB’s next governing council meeting June 5.

The meeting will take place against the background of a slow recovery in the 18 countries that share the euro currency and concern that Europe may fall into outright deflation, or a crippling downward price spiral.

Most economists think the bank will take some kind of action at the June meeting, probably cutting its benchmark interest rate from what is already a record low of 0.25 percent. That would marginally reduce the cost of credit when banks borrow from the ECB, in hopes they would pass such lower rates on to business and consumers.

The ECB could also impose a negative interest rate on money that banks deposit with it, pushing them to lend it instead of hoard it.

Yet Draghi focused on other measures in his speech, talking about ways to improve the flow of credit to small companies in countries still recovering from troubles over too much government debt.

One tool available to the ECB would be to make more cheap credit available to banks, so that they could lend it on to businesses. Or, the bank could purchase securities based on loans to small companies, an indirect way of making money available through financial markets. He said that a quarter of viable companies in Spain and a third in Portugal were finding it hard to get credit.

He also said the ECB could use broad-based purchases of financial securities if inflation remains low for too long. Currently, inflation is only 0.7 percent, below the bank’s goal of just under 2 percent. The U.S. Federal Reserve has made purchases of government and mortgage-backed bonds to increase the supply of money in the economy and promote growth and employment.

The ECB has, however, held off and many economists remain skeptical the bank will actually engage in large-scale purchases. Such as step would face practical, political and legal complications in the eurozone because it has 18 member countries. That raises the question of which countries’ bonds to buy, and whether such purchases would take the pressure off individual governments to reform their economies and finances.

Draghi said that an unexpectedly long period of low inflation could make it harder for indebted countries and companies to work off debt. That could lead firms to reduce investment and consumers to spend less, causing “a pernicious negative spiral, which then also affects expectations,” he said.

A too-prolonged period of low inflation “would call for a more expansionary stance, which would be the context for a broad-based asset purchase program.”

The eurozone economy grew just 0.2 percent in the first quarter compared with the previous three months, and unemployment is high at 11.8 percent.

McHugh contributed from Frankfurt, Germany.

Draghi: Cramped credit hurting recovery

KDWN

SINTRA, Portugal (AP) — European Central Bank President Mario Draghi said the bank needed to be on its guard against a “negative spiral” of low inflation that could drag down the economy – and it could engage in large-scale bond purchases to combat that if need be.

Draghi’s remarks at a conference in Sintra, Portugal, held out the prospect for action to stimulate the weak recovery at the ECB’s next governing council meeting June 5.

The meeting will take place against the background of a slow recovery in the 18 countries that share the euro currency and concern that Europe may fall into outright deflation, or a crippling downward price spiral.

Most economists think the bank will take some kind of action at the June meeting, probably cutting its benchmark interest rate from what is already a record low of 0.25 percent. That would marginally reduce the cost of credit when banks borrow from the ECB, in hopes they would pass such lower rates on to business and consumers.

The ECB could also impose a negative interest rate on money that banks deposit with it, pushing them to lend it instead of hoard it.

Yet Draghi focused on other measures in his speech, talking about ways to improve the flow of credit to small companies in countries still recovering from troubles over too much government debt.

One tool available to the ECB would be to make more cheap credit available to banks, so that they could lend it on to businesses. Or, the bank could purchase securities based on loans to small companies, an indirect way of making money available through financial markets. He said that a quarter of viable companies in Spain and a third in Portugal were finding it hard to get credit.

He also said the ECB could use broad-based purchases of financial securities if inflation remains low for too long. Currently, inflation is only 0.7 percent, below the bank’s goal of just under 2 percent. The U.S. Federal Reserve has made purchases of government and mortgage-backed bonds to increase the supply of money in the economy and promote growth and employment.

The ECB has, however, held off and many economists remain skeptical the bank will actually engage in large-scale purchases. Such as step would face practical, political and legal complications in the eurozone because it has 18 member countries. That raises the question of which countries’ bonds to buy, and whether such purchases would take the pressure off individual governments to reform their economies and finances.

Draghi said that an unexpectedly long period of low inflation could make it harder for indebted countries and companies to work off debt. That could lead firms to reduce investment and consumers to spend less, causing “a pernicious negative spiral, which then also affects expectations,” he said.

A too-prolonged period of low inflation “would call for a more expansionary stance, which would be the context for a broad-based asset purchase program.”

The eurozone economy grew just 0.2 percent in the first quarter compared with the previous three months, and unemployment is high at 11.8 percent.

McHugh contributed from Frankfurt, Germany.

Draghi: Cramped credit hurting recovery

KDWN

SINTRA, Portugal (AP) — European Central Bank President Mario Draghi says the ECB could take targeted steps to get credit flowing to struggling small businesses as a way to boost the tepid economic recovery.

Draghi said Monday at a conference in Sintra, Portugal, that the inability to get credit was hurting viable companies in countries such as Spain and Portugal and holding back growth there.

The ECB is widely expected to take some form of action at its next policy meeting on June 5. Draghi didn’t say what the bank would do then.

However, he said one tool that is available to the ECB would be to make more credit available to banks, so that they could lend it on to businesses. Or, the bank could purchase securities based on loans to small companies, an indirect way of making money available through financial markets.

He said that “could help reduce the drag on the recovery coming from temporary credit supply constraints.” He said that a quarter of viable companies in Spain, and a third in Portugal, were finding it hard to get credit.

Many economists think the bank will cut its benchmark interest rate from what is already a record low of 0.25 percent. That would marginally reduce the cost of credit when banks borrow from the ECB, in hopes they would pass such lower rates on. The ECB could also impose a negative interest rate on money that banks deposit with it, pushing them to lend it instead of hoard it.

A more drastic but far less likely step would be to start buying bonds and other securities in the market to increase the amount of money in the economy and help lower market interest rates. The U.S. Federal Reserve has done so with some success.

The eurozone faces a slow recovery, with growth of just 0.2 percent in the first quarter and high unemployment of 11.8 percent. There are also concerns that a low inflation rate of 0.7 percent could become ingrained for a long period of time. Low inflation makes it harder for countries and companies that have piled up too much debt to work off those burdens.

Draghi said the bank could engage in “a broad-based asset purchase program” if inflation and inflation expectations fell too low. However, purchases of financial assets such as government bonds face practical, political and legal complications in the eurozone because it has 18 member countries. That raises the question of which countries’ bonds to buy, and whether such purchases would take the pressure off governments to reform their economies and finances.

McHugh contributed from Frankfurt, Germany.

Draghi: Cramped credit hurting recovery

KDWN

SINTRA, Portugal (AP) — European Central Bank President Mario Draghi says the ECB could take targeted steps to get credit flowing to struggling small businesses as a way to boost the tepid economic recovery.

Draghi said Monday at a conference in Sintra, Portugal, that the inability to get credit was hurting viable companies in countries such as Spain and Portugal and holding back growth there.

The ECB is widely expected to take some form of action at its next policy meeting on June 5. Draghi didn’t say what the bank would do then.

However, he said one tool that is available to the ECB would be to make more credit available to banks, so that they could lend it on to businesses. Or, the bank could purchase securities based on loans to small companies, an indirect way of making money available through financial markets.

He said that “could help reduce the drag on the recovery coming from temporary credit supply constraints.” He said that a quarter of viable companies in Spain, and a third in Portugal, were finding it hard to get credit.

Many economists think the bank will cut its benchmark interest rate from what is already a record low of 0.25 percent. That would marginally reduce the cost of credit when banks borrow from the ECB, in hopes they would pass such lower rates on. The ECB could also impose a negative interest rate on money that banks deposit with it, pushing them to lend it instead of hoard it.

A more drastic but far less likely step would be to start buying bonds and other securities in the market to increase the amount of money in the economy and help lower market interest rates. The U.S. Federal Reserve has done so with some success.

The eurozone faces a slow recovery, with growth of just 0.2 percent in the first quarter and high unemployment of 11.8 percent. There are also concerns that a low inflation rate of 0.7 percent could become ingrained for a long period of time. Low inflation makes it harder for countries and companies that have piled up too much debt to work off those burdens.

Draghi said the bank could engage in “a broad-based asset purchase program” if inflation and inflation expectations fell too low. However, purchases of financial assets such as government bonds face practical, political and legal complications in the eurozone because it has 18 member countries. That raises the question of which countries’ bonds to buy, and whether such purchases would take the pressure off governments to reform their economies and finances.

McHugh contributed from Frankfurt, Germany.

Draghi: Cramped credit hurting recovery

KDWN

SINTRA, Portugal (AP) — European Central Bank President Mario Draghi says the ECB could take targeted steps to get credit flowing to struggling small businesses as a way to boost the tepid economic recovery.

Draghi said Monday at a conference in Sintra, Portugal, that the inability to get credit was hurting viable companies in countries such as Spain and Portugal and holding back growth there.

He said the ECB could make more credit available to banks, so that they could lend it on. Or, the ECB could purchase securities based on loans to small companies, an indirect way of making money available.

He said that “could help reduce the drag on the recovery coming from temporary credit supply constraints.”

He didn’t say what the bank might do at its next meeting June 5.