PARIS (MNI) – The following is the second installment of the
introductory statement delivered Monday by European Central Bank
President Mario Draghi in the European Parliament in Brussels.

“Let me now turn to the outcome of the last European Council.

This Council has really brought about a breakthrough in terms of
commitment to sound and transparent fiscal rules. The foundations for a
fiscal compact have been laid – a suggestion presented before the
plenary of the European Parliament at the ECB hearing on our annual
report at the beginning of this month.

It has been agreed that the annual structural deficit should not
exceed 0.5% of nominal GDP. Euro area Member States will implement such
a rule in their national legal frameworks at a constitutional level. The
objective is to avoid excessive deficits before they arise, rather than
trying to control them after they have emerged. An automatic correction
mechanism is also foreseen in case of deviation. Moreover, the leaders
agreed on a numerical benchmark for annual debt reduction to bring down
debt levels. Sanctions will also apply automatically to euro area Member
States in breach of the 3% reference value for deficits. The European
Court of Justice may be asked to verify the implementation of these
rules at national level.

The new fiscal compact is an essential signal, showing a clear
trajectory for the future evolution of the euro area. It frames
expectations of both citizens and financial markets. Enshrining strict
rules in primary legislation, making them enforceable by the European
Court of Justice: all of this should contribute to making public
finances in the euro area credibly robust. The ECB welcomes this
outcome.

As regards the euro area crisis management instruments, we welcome
the decisions of the Heads of State or Government of the euro area to
strengthen the EFSF and the ESM in a number of areas.

First, there is now greater flexibility in the euro area crisis
mechanisms to act as backstops, thanks to the decision to accelerate the
entry into force of the European Stability Mechanism, ESM, to July 2012
and for the European Financial Stability Facility, EFSF, to remain
active in financing programmes that have started until mid-2013.

Second, the clarification that as regards private sector
involvement, the euro area will adhere to established IMF practice is
also helpful in reassuring investors.

Third, the decision to include an emergency procedure into the
voting rules of the ESM [1] is essential for effective decision making
procedure, especially in crisis situations.

As regards the EFSF, the Governing Council of the ECB has decided
that the ECB will be able to act as agent for the EFSF in its market
operations. The ECB probably supported by a number of National Central
Banks – will make its technical infrastructure and know-how available to
the EFSF. The technical and legal preparations have started and we hope
to complete them in January.

III. Credit rating agencies The activities of credit rating
agencies, notably in relation to sovereigns as well as the EFSF, have
lately occupied centre stage in the debate in Europe. Calls for better
regulation have become louder. Against this background, the Commission’s
recent legislative proposals on Credit Rating Agencies, which the ECB
broadly supports, is also discussed by this Committee.

Credit ratings have a direct impact on the market functioning and
the wider economy. A sound and robust framework must thus be created.
This framework should be geared towards the following objectives: to
reduce market volatility; to enhance the quality of rating process; and
to restore market confidence.

The two issues that are of particular importance are, first, the
assurance of appropriate underlying methodologies and the transparency
of ratings; and second, the reduction of hardwiring of ratings in
legislation and market practices. Ratings simplify complex risk
assessments. But they should only be one of several inputs for
investors. In particular, they should be no substitute for financial
institutions and other investors to carry out their own assessment. This
is the main step towards avoiding mechanistic reliance on external
credit ratings.

Let me say a few words on how the ECB itself uses ratings. In
practice, for the large majority of marketable securities (such as
sovereign bonds) the Eurosystem Credit Assessment Framework mainly uses
the ratings issued by eligible credit rating agencies. At the same time,
the Eurosystem does not mechanically rely on these assessments, as it is
aware of the limitations of methodologies. It reserves the right to
reject or limit the use of an asset on the basis of any information on
its credit quality that it may consider relevant. The Eurosystem has
applied such discretion to temporarily suspend the application of the
minimum rating requirement to debt instruments issued or guaranteed by
some euro area governments following EU/IMF adjustment programmes.

Thank you for your attention.”

–Paris newsroom, +331-42-71-55-40; paris@marketnews.com

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