Draghi: Cramped credit hurting recovery

Staff Writer
Columbus CEO

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."

The ECB is widely expected to take some form of action at its next policy meeting on June 5, but Draghi would not specify what the bank was likely to do.

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 was "not resigned" to the current low level of inflation.


McHugh contributed from Frankfurt, Germany.