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Low rates worry can’t be cause for inaction

Official interest rates have been lowered rapidly to confront the global credit crisis and, in many countries, they are near zero, he said.

“Worrying about getting too close to the lower limit for nominal interest rates cannot be a reason for inaction,” Draghi, who is also the governor of the Bank of Italy, said in an address at a business conference.

In the euro zone the real short-term interest rate is below 1 percent. If official rates had not been cut, the rate would have risen considerably because of the fall in inflation, he said.

“The Governing Council is keeping a close watch on the real cost of money,” Draghi said.

In dealing with the credit crisis, measures announced by various countries, such as fencing off the most problematic securities on banks’ balance sheets or transferring them to “bad banks”, are welcome moves, he said.

“Along the lines of what has been done in some countries for existing ‘toxic’ securities, consideration could be given to public guarantees for senior tranches of new credit pools,” he said.

“Retaining part of the risk themselves, the banks could place these securities more readily, reviving a substantial channel of finance that is inactive today.”

Authorities need to set up a strategy to ensure monetary expansion is effective once normality returns, he said.

“The liquidity pumped into the economy should be rapidly drained.”

U.S. and European moves last autumn to bolster banks, such as guarantees on deposits and securities, prevented the collapse of the system, he said.

“Their usefulness is steadily declining, however; it is now urgent to proceed to new recapitalisations aimed at growth and interventions to support banks’ assets.”

Since state intervention alone is not enough, the private capital market must be reactivated, he said.

“The condition for this is the absolute transparency of banks’ assets,” Draghi said.

“Internationally coordinated action by supervisors in the principle financial centres is needed to produce uniform valuations of banks’ assets in order to enhance the reliability of financial statements.”

Turning to protectionism, Draghi called it a “siren song” that must be avoided.

“It is important for the new U.S. administration to take a firm stand against demands for trade restrictions, and crucial that appeals for free trade should not be contradicted by action within the European Union itself.”