MEXICO CITY (MNI) – The Eurozone’s economy is showing increasing
signs of economic stabilization and markets’ confidence in the Eurozone
is recovering, European Central Bank President Mario Draghi said Sunday
during a press conference following a meeting of G20 finance ministers
and central bankers.

“The economic situation has changed since the last G20 summit…
For the average of the euro area, the situation seems to be one of
stabilization,” Draghi said.

Draghi ascribed the improvement to massive reform efforts by
European governments.

“The reform effort is certainly vast and widespread in Europe. It
is not only on national levels. Since the last summit, we have had
major events of new and improved Eurozone governance and commitments to
review the size of the firewalls in March,” Draghi said.

Fellow G20 members recognized European efforts during the summit.
In particular, the ECB’s policies “drew vast praise from basically
everybody,” Draghi said.

“Let’s see what the impact on markets will be,” Draghi cautioned,
while at the same time pointing to recent positive developments.

Some markets have re-opened, U.S. money market funds that were the
first to run away from Europe have now increased their exposure, and
bond spreads have come down, Draghi observed. He pointed out that the
European Banking Authority expected banks largely to achieve higher
capital requirements without additional deleveraging.

“There is a return of confidence of the overall financial markets
in the euro. The general sense is that the euro is now a safer place
than it was at the time of the Cannes summit,” Draghi said.

Draghi said that the ECB’s three-year LTRO “seems to have
contributed to dramatically to reduce the financial instability that
still persisted until year-end.”

However, he said that it is still too early to say whether funds
borrowed in that operation will find their way into the real economy.
“We are now in the course of having a second bank lending survey just to
asses the impact of the first LTRO,” Draghi said.

However, he argued that even if lending as a result of the first
tender is limited, funds allotted in the second tender could be used
more widely for the purpose.

“One can infer from the numbers that much of the LTRO has been used
by the banks to repurchase their bonds coming due in the first quarter
of this year,” he said. “One expectation now is that having satisfied
their funding needs for this year at least, the banks will be more
inclined to use this money – which was our primary expectation really –
to expand credit into the real economy.”

Draghi dismissed criticism that the ultra-long refinancing
operation could lead to instabilities in the financial system. “We see
M3 still declining. We don’t have any sense that this abundant liquidity
is actually translating itself to risks for the economy. We see credit
tightening, not credit booming, and this is true for the whole of the
euro area.”

Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com

[TOPICS: MT$$$$,M$$EC$,M$X$$$,M$$CR$,MGX$$$]