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CNBC Transcript: Exclusive interview with Yves Mersch, Board Member, European Central Bank at the Ambrosetti Workshop


Following are excerpts from an exclusive CNBC interview with JuliaChatterley and Yves Mersch, Board Member, EuropeanCentral Bank.

JC: So thank you so much for joining us. Mario Draghi said at the lastmeeting that he believed the ECB believed that they were done as far as furtherdeposit rate cuts are concerned. Is that still the view of the ECB?

YM: Well you know that the President of the ECB is also the spokesman ofthe Governing Council which is the highest decision making body of the ECB sohe faithfully reflects the discussion that takes place in the GoverningCouncil. Now let me also add that he said we are done unless something newdevelopments would occur and would justify new reaction function to it.

JC: But as faras you’re concerned, no new events have arrived that would suggest that ratesneed to be taken lower?

YM: I do not say that we would in case there would be new external shocksautomatically revert to one instrument over the other instrument – ourinstrument toolbox is quite large. So what I would say is that we would have tolook at the nature of the external shock and then try so see how we canrecalibrate our answer, our response function to this nature of the shock. Letme add that, since then, there is one element which has, I would say, to someextent negatively surprised us and that is the foreign exchange market.

JC: So in that vein, the discussion we heard in the last 24 hours from thelikes of Peter Praet, Vitor Constancio about the ability to further lowerdeposit rates. Is that in response to the negative result you talk about in theforeign exchange market.

YM: No, I think you should stick to what the president has said during hispress conference and he has said that we are quite aware of the complexity ofthis instrument which might also be -- I mean the negative interest territory-- as instrument where we are aware of negative consequences and where we arealso aware that the future use of this instrument might lead to nonlinearitieswhich might even amplify negative consequences. It is not only a question tolook at these instruments from an econometric model point of view - becausethey are not linear. I think one should not leave out of sight behaviouralattitudes in the public and you have seen that the public might even considerthat further cuts would announce further doom down the road and therefore mighteven have a totally different attitude, not being spurred to dis-invest ordis-save and start consuming and investing, but it might even save more. So Ithink it is a discussion that we’ll have to see in the future how we use theseinstruments very carefully.

YC: So for all the concerns you have raised there about the use ofnegative deposit rates, again the discussion seems to be focussing on theprospect of using them in the future if necessary. Is the ECB targeting aweaker Euro?

YM: No, but we are targeting that everyone should be living up to thepromises how the international monetary system is being run. And the means thatthere should not be, I would say, competitive devaluations. There should not bebegger-thy-neighbour policies. And the areas which have already more, moreon the safer side as what concerns both growth and inflation, should not try totalk down their currency, vis a vis the currencies in the areas where such asituation is not that dire.

JC: You’re combatting a weaker dollar?

YM: Next week we have the meetings in Washington and I very much hope thereis a strong reconfirmation on the way we are running this internationalmonetary system.

JC: You’re concerned about the Yen as well?

YM: The Japanese economy is in a situation that is much closer to theEuropean situation than other jurisdictions

JC: So when you are setting monetary policy, you acknowledge that this isa factor that you have to consider – the concerns you have about competitivedevaluations, however they come about.

YM: We have always said that the exchange rate is a factor for inflationand its a factor for growth. Our inflation rate has been positive and throughrecent developments we have now gone down to zero inflation rate. So thereserve buffer in the European context is not very large.

JC: Do you think that the Europeans are suffering as a result of thestronger Euro in an environment where, as you quite rightly point out, othercountries are having a downward impact on their currency?

YM: I do not want to over emphasis the role of the exchange rate. It’s notthe target objective of the central bank of our monetary policy. I only want tosay that we have been careful when we modelled our package to really try tofocus it on the internal side of the economy. And therefore also in our publicstatements, we are careful to remain faithful to the international agreementsthat exchange rates should reflect fundamentals.

JC: Was there a greater emphasis on that at the G20 meeting in Shanghai?

YM: You know that there had been a reconfirmation. There have been a fewmore lines on this than it is usual is this case but I think that it is useful.

JC: Message received. Let’s move on and talk about the banks, because asyou pointed out, there are implications, spill-over effects of negative depositrates. And we’ve seen the banks stocks index in Europe off over 20% since thehighs that we saw earlier this year. Do you think bank investors areover-estimating the down-side risks of negative deposit rates as they stand inEurope?

YM: Prices of bank stocks in Europe to some extent speak for themselves.But they are not only the consequence of negative interest rates. I think thereare other consequences and that is uncertainty on regulation, for exampleuncertainly on the amount of dividends that could be paid out. There isregulatory uncertainty concerning capital requirements – all this has beenweighing as well on the invest-ability of European banks - if I can call itthat way. But if I look at the aggregate figure, I think it has been said bycolleagues, that negative interest rates also improve the general economicsituation, alleviate the pressure from non-performing loans and thereby theprovisioning that banks have to put aside. Banks also make profits on thestocks of securities which move in the direction of more profitability for themso, all in all, in an aggregate way, I would not buy the argument that negativeinterest rates are not usable. What is the case is that, that is also what thepresident has said in his press-conference. It’s the complexity of the Europeanbanking landscape is much higher. There are banks who face, for example,national regulation which prevent them to adjust some of their deposit base tothe movement of interest rates of the central bank. So those banks are ofcourse in a more difficult territory because their margin is immediatelysqueezed, much more than in other countries.

JC: It doesn’t get more difficult I think than Italy with thefragmentation we’ve got here, the low profitability for some of thesmaller-medium... I think investors reflect that too in the pressure they puton Italian stocks this year.

YM: Investors look on future prospects of profitability, that’s inevitableand if you have uncertainty in this respect then you will shy away and this iscertainly something that plays. But it’s not only again the negative interestrates. You have to look at the business model of each bank.

JC: But the ECB is not worried unduly about the Italian banking sector?

YM: The single supervisor at the ECB has taken strong positions in thisrespect and this is being endorsed at the highest level of the decision makingbodies at the ECB. I think no one can deny that the level of non-performingloans is higher in some countries than in others.

JC: But the point is you’re putting your fingers on the pulse and saying:need to do more, where necessary.

YM: This has been said for all the countries. The supervisor has given itselfan agenda for the year to come. And part of that agenda is to look the level ofnon-performing loans in all the countries. So as an outcome of this monitoring,some countries will receive recommendations that might not be the same as othercountries.

JC: There’s also been a focus put on the banking sector as a result of thePanama leaks. As the banking supervisor in the Eurozone what action are youtaking, or will you take, as a result of this?

YM: I think the supervisor has to look into compliance. But now, you know,that banking supervision has been transferred to the ECB does not include anymoney laundering, does not include counter-terrorist financing… but of course abank which does not comply by those rules is a bank whose future is also indoubt and where we will have to look at the fit and proper decisions that havebeen taken in the past.

JC: Because there is a moral element to this too, I mean there’s a legalbut there’s also a moral element.

YM: We are not a moral institute. We are an institute that goes by thelaw.

JC: I want to ask you about Greece if I may. It seems like the governmentis going full-frontal on the offensive versus the IMF. How, as one of thecreditors, do you handle this – should this be handled?

YM: You know that, for the moment, the teams are sitting together inAthens. And if I look at the divergence I would say this is not something thatcould not be bridged with some good faith from every side.

JC: But the IMF should remain…

YM:I think the IMF has to some extent is entitledto assessments which might not be totally the same assessments as those done bynational authorities or other international bodies. But in the end, once youthen narrow down on what is a technical divergence of view and what is a judgementaldivergence view.