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European Central Bank President [COLOR=#0000ff]Mario Draghi[/COLOR] said while investors had largely priced in the euro-area sovereign downgrades from [COLOR=#0000ff]Standard & Poor’s[/COLOR], there should be less reliance on their ratings.
“It seems to a great extent markets have anticipated these ratings changes and priced them in,” Draghi said today at the European Parliament in Strasbourg. “We should learn to do without ratings, or at least we should learn to assess creditworthiness” with less reliance on the rating companies, he said.
S&P stripped [COLOR=#0000ff]France[/COLOR] and Austria of their top ratings on Jan. 13 and cut seven other euro countries in a move that left [COLOR=#0000ff]Germany[/COLOR] with the bloc’s only stable AAA grade. Efforts to combat the debt crisis are falling short, S&P said. The rating company today removed the AAA grade of the European Financial Stability Facility, which is designed to fund rescue packages for [COLOR=#0000ff]Greece[/COLOR], Ireland and [COLOR=#0000ff]Portugal[/COLOR].
Investors shrugged off the S&P downgrades. France sold 1.895 billion euros ($2.4 billion) of one-year notes today at a yield of 0.406 percent, down from 0.454 percent on Jan. 9. The Treasury sold a total of 8.59 billion euros in bills, including three and six-month paper. Yields fell on both.
‘Very Grave’
Draghi nevertheless said growth prospects in the euro region are “dismal” and that the situation is “very grave.” He said the ECB’s three-year loans to banks last month had helped to avoid “a major credit crunch.”
“We see that the key refinancing markets for banks are clogged; the [COLOR=#0000ff]interbank market[/COLOR] is basically not functioning,” Draghi said. “The unsecured [COLOR=#0000ff]bond market[/COLOR] was not functioning -- completely not functioning -- until we launched this facility. We have avoided a major credit crunch, even though in some parts of the area this credit crunch” is “already on its way.”
Draghi indicated the ECB will continue to intervene in bond markets to limit yields without ramping up its purchases for fear of breaching the prohibition on monetary financing.
“The ECB, within the primary remit of [COLOR=#0000ff]price stability[/COLOR] and within the remits of the Treaty, will do whatever it takes to assure financial stability,” he said.
Draghi urged European leaders to implement the plans they have agreed on to win back investor confidence.
“Decisions without matching actions are not enough and due care should be taken to implement measures in the correct sequence,” he said. “We need to restore confidence in sovereigns and ensure that EU firewalls are operational and well equipped with an effective and flexible mandate.”
Draghi Says Europe Should Rely Less on Assessments of Ratings Companies - Bloomberg
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