–Adds Comments From WSJ Interview And From FAZ Interview

PARIS (MNI) – The doubled-barreled bailout and debt-reduction deal
reached at the Eurogroup meeting early Tuesday morning “could be the
beginning of a new world for Greece, where the pending financing
problems have been addressed,” European Central Bank President Mario
Draghi said in an interview published Thursday on the website of the
Wall Street Journal.

But for that to happen, he added, Greece must now enact all the
deficit-cutting measures and longer-term reforms it has promised.

“The Greek government has undertaken very serious commitments in
the fiscal policy and in the structural policy areas,” he noted. “But
there are implementation risks and probably upcoming elections. The
Eurogroup gave reasonable probabilities to the success of the program if
the measures, especially the structural measures, were undertaken.”

Despite the ongoing social tension and sometimes violent
confrontations in the streets of Athens, Draghi seemed sanguine about
the willingness of most Greeks to accept the economic pain caused by the
austerity measures being imposed on top of an already deep recession.

“The number of people who favor default, inflation or even an exit
from the euro doesn’t seem to be prevalent in Greece,” he said.

The ECB chief also downplayed the notion, clearly a concern in
financial markets, that Portugal could follow in Greece’s footsteps.
Asked if he thought the government in Lisbon would need another bailout,
Draghi replied: “No. We consider the program on track.”

Asked whether Portugal might benefit from restructuring its debt,
as Greece has just negotiated with its creditors, Draghi once again
sought to discourage the idea. “We have confidence that the program
countries are taking appropriate actions and that the targets of their
programs are achievable and realistic,” he replied.

But he was not prepared to say the Eurozone debt crisis has been
resolved. “It’s hard to say if the crisis is over,” he said.

On one hand, there have been a number of “positive changes” in
recent months, he noted, including greater financial market stability,
more resolute deficit-cutting and reform agendas by Eurozone
governments, the new “fiscal compact” to reinforce fiscal surveillance
and enforcement, a less fragile banking a system, and a growing
recognition by governments of the need to relinquish some of their
national sovereignty for the greater good of the union.

On the other hand, the Eurozone economic recovery “is proceeding
very slowly and remains subject to downside risks,” Draghi cautioned.

“I was surprised too that there was no elation after the approval
of the [Greek] package, and this probably means that markets want to see
the implementation of the policy measures,” he added.

Draghi was asked what he thought about forcing austerity on Greece
“at all costs” in order to bring down the public deficit.

“This is actually a general question about Europe,” he replied. “Is
there an alternative to fiscal consolidation? In our institutional set
up the levels of debt-to-GDP ratios were excessive. There was no
alternative to fiscal consolidation, and we should not deny that this is
contractionary in the short term.”

He said that the strategy would pay dividends in the future through
the “so-called confidence channel, which will reactivate growth. But
it’s not something that happens immediately.”

Draghi reiterated that the ECB’s first three-year refinancing
operation, which pumped E489 billion into the banking system, had helped
open up the senior unsecured bond market. “But for the interbank markets
to function, we need a return of full confidence in the counterparty. We
can address only the liquidity side of the problem. But then growth
prospects have to pick up.”

He acknowledged that the last bank lending survey published by the
ECB “was not positive.” It showed that credit was tighter “all over the
euro area” and “more dramatically in the southern regions,” he noted.
Because of the timing of the survey, he stressed, the full impact of the
E489 billion LTRO was not captured. But he strongly suggested that not
much of it went to lending. The net injection from the operation, after
factoring out a drain of E280 billion in shorter-term money, was E210
billion — exactly the volume of bank bonds coming due in the first
quarter. “Therefore, it is likely that banks simply repurchased their
own bonds coming due,” he said. “We have avoided an even worse credit
crunch.’

The ECB president defended the central bank’s decision last week to
protect itself from potential losses by trading in its Greek bonds for
new, identical to ones that would be exempt from any forced default.
“The purchase of these bonds was done for public interest reasons,” he
said, adding that the money the ECB spent “is not private money. It is
public, taxpayers’ money.”

Draghi said that despite all the talk, he had so far seen no
evidence that the Chinese government is investing in Eurozone sovereign
bonds. “So far I don’t see any official public involvement in European
financial markets. There has been lots of talk and conversations. I hear
about them but, I haven’t seen any official investment in European
financial markets.”

In an separate interview with the German daily Frankfurter
Allgemeine Zeitung, Draghi said that the political debate in Greece had
become more favorable toward reform, but again highlighted the risks in
implementing the bailout deal.

“The key to controlling risks lies with the implementation of the
program, which has to be flawless,” Draghi said. “The upcoming elections
will be very important. It is essential that the new government supports
the program, just as the old one has.”

Regarding the private-sector debt swap, Draghi said that collective
action clauses might have to be introduced to achieve a sufficient level
of participation and that Greece’s credit rating could be lowered to
“selective default” as a result.

He said the ECB would still be able to accept Greek bonds as
collateral if that happened because of credit enhancements to be
provided in the bailout by the European Financial Stability Facility.

Draghi said that the ECB’s decision not to participate in
private-sector haircut on Greek debt would not harm European debt
markets, even though it effectively made the central bank a senior
creditor.

The risk is “not very great, because the amount of our bond
purchases, compared with the entire market, is small,” he argued. “For
that reason, we do not see any effect on risk premia either. Moreover,
Greece is a special and unique case of private sector involvement.”

Draghi dismissed fears that the ECB’s injection of nearly E500
billion into the banking system through a three-year LTRO might be
inflationary.

“There is no sign of inflationary tendencies in the euro area,
quite the opposite,” he said. “And if there should be any sign of future
inflation, we have the instruments with which to absorb the liquidity
again within a short space of time.”

Draghi added that while the ECB has been buying fewer bonds though
its Securities Market Program, it was not yet ready to discontinue the
effort.

“The markets are still vulnerable, and so we have to be very
careful about announcing the end of such an instrument,” he said. “The
Securities Markets Program has served a purpose since it was
introduced.”

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

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