Some Spanish media has interpreted Draghi’s words as if he does not rule out the possibility of any Spanish institution failing the stress tests. But it is very possible that the ECB President would have given a similar about the individual situation of the banks of Italy or Germany. It is always best to be cautious, yet it is too early to venture stress tests results when we don’t even know what the previous test -Asset Quality Review- will be about.
Draghi’s words should rather be taken as explicit support for the efforts of the Spanish banking sector. In fact, the head of the ECB highlighted the progress made by the Spanish authorities in terms of adjustment, recapitalization and assets sale. In this sense, he agrees with the troika, which completed its fourth visit to Spain this week and praised the same thing.
Moreover, markets expected some clue of the ECB on the third happy hour of liquidity (LTRO), but Chairman Draghi followed the script and said again he is prepared to launch “any available instrument” to ensure funding of the banking sector, including the LTRO.
Markets barely reacted to these words, which could be interpreted as that there was no surprise. Should we had to make conclusions of Draghi’s message, then banks should take note of this phrase: “Liquidity cannot replace the entities’ capital.”
As for the recession, the President of the ECB said that the recovery continues to be “weak and fragile”. Therefore, interest rates continue to be low (now in 0.50%) “as long as necessary.” They could even go lower, something that was discussed at the Governing Board on Wednesday, although with the same result as on previous occasions: ‘hawks’ and ‘doves’ remain divided.