FRANKFURT (MNI) – The following is the first part of verbatim text
of the introductory statement by European Central Bank President Mario
Draghi before the Committee on Economic and Monetary Affairs of the
European Parliament in Brussels on Tuesday:

Introductory statement by Mario Draghi, President of the ECB,
Brussels, 9 October 2012

Madam Chair,

Honourable members of the Committee on Economic and Monetary Affairs,

It is a pleasure to be back here in Parliament and in front of your
Committee for our regular exchange of views.

As you know, the European Central Bank (ECB) has recently taken
important decisions to address severe distortions in government bond
markets. The ECB stands ready to undertake, under appropriate
conditions, what we have called outright monetary transactions (OMTs).
These provide a fully effective backstop to avoid destructive scenarios
that might threaten price stability in the euro area.

Our OMT announcements have helped to support financial market
confidence. The ECBs actions can help to build a bridge. But the bridge
must have a clear destination.

Reaching that destination involves three processes: first, full
implementation of fiscal consolidation and structural reforms to enhance
competitiveness; second, full implementation of financial sector reform;
and third, completion of a genuine economic and monetary union. The
establishment of a Single Supervisory Mechanism (SSM) is a key step in
these processes.

Today, I will review economic and monetary developments since July.
I will then explain in some detail the rationale and modalities of the
OMTs. I will end by sharing my views on one of the four building blocks
of a genuine economic and monetary union, namely the financial market
union.

I. Economic and monetary developments

Let me start with the economy. Since our last meeting, the ECB has
left its key interest rates unchanged: the main refinancing rate stands
at 0.75%; and the deposit rate at 0%; the marginal lending facility at
1.50%;.

Economic activity contracted in the second quarter of 2012. Looking
ahead, we expect weak economic activity in the near term and only a very
gradual recovery after that. The risks to this outlook are on the
downside, mainly related to the tensions in several euro area financial
markets.

Average inflation in the euro area stood at 2.7% in September,
reflecting indirect taxes and high energy prices. It should decline to
below 2% in the course of 2013. Underlying price pressures should remain
moderate given modest economic growth and well-anchored long-term
inflation expectations. Risks to the outlook for price developments are
broadly balanced.

Our monetary analysis paints a picture consistent with price
stability. In particular, the underlying pace of monetary expansion
remains subdued. Loan dynamics are also subdued as a result of weak
demand for credit but also restrictions on the supply of credit in some
euro area countries.

2. Outright monetary transactions (OMTs)

Let me now explain the decision announced by the ECBs Governing
Council in September on outright monetary transactions.

The impact on financial and monetary conditions of past reductions
in key ECB interest rates differed considerably within the euro area.
For example, in some countries, following cuts in key ECB interest
rates, the rates charged by the banking system for credit to the real
economy have declined only a little, if at all. In other countries, ECB
rate cuts have been fully passed through.

One reason for this difference is that the cost of bank credit to
firms is inevitably linked to the cost of market funding for the banks
themselves. If there are fears about potential destructive scenarios,
the cost of funding for banks can be affected asymmetrically across the
euro area. This means that two firms that are otherwise identical and
have the same creditworthiness have benefited to a different extent from
past cuts in key ECB interest rates, merely because they are located in
different countries.

It is that distortion in financing costs that hinders the smooth
functioning of credit markets and the transmission of monetary policy.
It is that distortion which keeps some countries in what I have
previously described as a bad equilibrium. And it is that distortion
which falls clearly within our mandate to address.

To counter the impairment of monetary policy transmission and to
preserve the singleness of the ECBs monetary policy, the Governing
Council decided to undertake outright monetary transactions.

OMT interventions in government bond markets provide a fully
effective backstop to avoid destructive scenarios that might threaten
price stability in the euro area. The aim is to ensure that the ECBs
monetary policy stance is transmitted more evenly to the real economy
across euro area.

The ECB will conduct OMTs if and as long as countries comply with
strict and effective conditions attached to an appropriate programme via
the European Financial Stability Facility and the European Stability
Mechanism.

Conditionality preserves the primacy of our price stability mandate
and ensures that OMTs will not compensate for a lack of fiscal
consolidation. Conditionality in particular preserves the incentives for
governments to continue with economic and fiscal adjustments. And only
if conditionality is fulfilled will the OMTs be successful in moving an
economy towards what we might call a good equilibrium.

OMTs are ex-ante unlimited but, as I have just explained, they are
not unconditional. Exit from OMTs would take place once their objectives
have been achieved or when there is a failure to comply with a
programme. OMTs would not take place while a given programme is under
review and they would resume after the review period once programme
compliance has been assured.

Consistent with the Treaty prohibition of monetary financing, the
ECB will only conduct transactions on secondary markets, buying from
investors and not from governments. Purchases will focus in particular
on government bonds with remaining maturities of between one and three
years. This is in line with the traditional focus of central bank
monetary operations.

The ECB will accept the same treatment as private or other
creditors with respect to bonds purchased in the context of OMTs. And
the ECB will be fully transparent on its OMTs. We will report weekly on
total portfolio holdings, and monthly on the average duration of our
holdings and the breakdown by country.

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