Following are excerpts from a CNBC interview with Julia Chatterley and Vítor Constâncio, Vice President of the European Central Bank, from ECB Forum on Central Banking in Sintra, Portugal.
JC: Can I start by asking you about the market reaction to the Brexit vote. Do you think investors have over-reacted somewhat?
VC: Well markets always do in such circumstances in particular because to many people in the market the result of the referendum came as a surprise. So as a result there was certainly overshooting and we saw today that there was a rebound in the markets already. So they did not continue to go down so after the element of surprise was more digested, no one knows of course how the markets are continuing to evolve. But judging by these reactions and the fundamentals around the problem hopefully markets will start to stabilize and that's very important because it proves, by the way, that the markets worked smoothly. There were many concerns about market liquidity if in a situation of stress, a shock, there would be enough buyers and sellers so that the prices could be formed and the markets could work. They did. So market liquidity was there contrary to many rumors and concerns before. And that's an important sign that the consequences of the event can indeed after a significant drop in several markets, can indeed stabilize.
JC: Alan Greenspan compared this to the Lehman's crisis, he said actually it's worse because it's more corrosive, is that wrong?
VC: Well in terms of market developments I think indeed the comparison does not apply because the reaction to Lehman as you may recall was that several markets froze, ceased to work, no price formation, no buyers and sellers, and the big impact all over the world. That was not the case this time. That's one point, very important difference of course. And the second is that the negative effects on prices in markets were more extended in the case of Lehman that indeed triggered a major international crisis. So the reaction of the markets so far do not justify the comparison, and indeed I'm sure that I am objective in saying that many market observers and analysts were expecting worse in such an outcome. Now of course it is not over in terms of the economic consequences. We enter another phase of these process and of course the exit of the UK will have negative consequences in the coming years for growth in the UK in particular. Of course, as it was, investment with the uncertainty, will not be buoyant and that will affect potential growth of the UK economy. So there will be these developments. Also it is to be expected that after the drop in the pound, this means that international terms, the purchasing power of the UK economy will be permanently lower than otherwise would have been and so on. For the euro area the effects are much reduced in comparison with the effects to the UK of course meaning that there will be, there was already some negative effects in markets but for instance whereas the pound has gone down 8 or 9 percent against the dollar, the euro went down just 2 percent in these last few days we had no problems in what regards fragmentation of sovereign bond markets, though the bond market in general saw some increase in spreads but not very significant including senior bank bonds and that I'm sure is also the result of our policies of purchasing and in that way protecting both public and private bonds because we are purchasing both as you know. So..
JC: If I look at the share prices of banks here just in the last few days Deutsche bank down 14%, SOCGEN 20%, UNICREDIT 22% I mean that kind of tells me that there's still extreme lack of confidence in the European banking sector?
VC: That's indeed the weak point where the impact on the euro area was more severe and very significant as you say, no doubt. For the rest even the funding and liquidity of banks no problem and so on. But stock prices went down which is a reflection as you say of sudden lack of confidence in the banks. The idea is I suppose in the minds of the investors who are selling is that this can perhaps in their minds provoke a recession which I don't believe in the euro area if nothing else happens, and as a result the banks would suffer and so on. Nevertheless there was a rebound today... bank stock prices went up around 3 percent. We will see now we have to see where the markets will stabilize, they overshot, now there's rebound we have to wait a few days to see where this goes. But there is indeed that situation of negative appreciation by the markets.
JC: I want to ask you a final question on this and then we'll move on . I think a lot of investors are looking at Italy now as being the next domino to fall and concerns about the Italian banking sector. Can we just draw a line under this and say there's no further discussion going on about 40 billion euro bailout deal I read this morning, not quite sure how that was going to be financed. But can we draw a line under these concerns too here?
VC: As I say about market developments we'll have to wait a few days to see where they go. Maybe the rebound will continue because the fundamentals have not changed in a big way. And as I just mentioned the economic consequences are for the euro area much reduced. Let's just think that for instance the export of the euro area to the UK represents 3 or 4 percent of GDP. So even if some investment banks that have published recently projections for the UK saying that the UK will have this year and the next perhaps a recession between minus 2 and minus 3, if that would materialize with trade links that would imply just 0.1 percent drop in the euro area GDP. Of course the transmission is not only through trade, there are aspects of confidence, investment decisions all that other channels, but it just illustrates the fundamentals of banks have not changed from one day to the other just like that, so we have to wait and see and then adjust to the situation that in the end may prevail.
JC: I want to move on from BREXIT because you have a number of other things going on and the world doesn't stop turning just because of this vote in the UK. What's the message here today about the work that the ECB's doing and will continue to do because you're still facing significant challenges?
VC: Yes but it's also important to underline that as the reaction in several markets show, our policies have been exerting a quite stabilizing effect in such a shock. Also our monetary policy is working in the sense that has effect in the economy and the situation would have been much worse if we had not adopted particularly since 2014 the set of measures that we have adopted and that's an important consideration, because monetary policy has been the only expansionary policy in the euro area, and it is working in that respect by sustaining the situation, helping as we have been saying all along for quite a number of years now, we need other policies also to help in the same direction to stimulate growth and efficiency but we are doing our part and I think that everyone is aware that indeed our contribution has been quite vital to sustain the situation in the Euro area.
JC: You've got two battles I see. You've got a battle with policymakers in the Eurozone that need to do more to stimulate the economies, as you said you could only do so much, but you've got another battle with other central banks as well and their actions and the kind of off-setting effect in a sense that they have. What's the bigger battle here?
VC: Well I don't, I don't see it as a battle you know. Each Central Bank has its mandate and its specific situation and each is trying to respond to that situation and if you compare us with the Fed, the Fed is in a different phase of the cycle, the cycle of recovery in the US is more advanced than in Europe, so the Fed started to increase rates, we are not yet in such a situation. So both are doing their job according to their conditions so there is no battle. And if indeed the U.S. economy will consolidate recovery so that the Fed sees as appropriate to continue to increase rates that's a good sign for the world economy because it proves that a major country is getting out of the recessionary period after the crisis and getting away also from the zero lower band of interest rates. So that will be very important. And no conflict or no tension or no contradiction between our two policies.
JC: Would you like to see greater coordination, there's a lot of questions being asked today of the Bank of Japan and perhaps what they're going to do about the strength of their currency and again this belief that actually other central banks will be unhappy if they intervene?
VC: Well I don't know about that but indeed policy for the G7 countries, the major economies, is that we are in a system of floating rates and that unilateral interventions should not happen. That's the policy line of the G7 so.. yeah I certainly hope that everyone respects ...There are situations where
There are situations where there have to be talks and you know a consensus and a collective orientation, but that's different from unilateral decisions.
JC: I want to ask you a final question, Mario Draghi did express sadness about the UK vote on Brexit. I wanted to ask you personally how you feel about it and how do we move on in Europe, what's the fix here?
VC: Well I certainly was quite sad for many reasons of all sorts including personal, my daughter lives in the UK, my grandchildren are there and will grow there. So it's indeed sad but I don't want to comment of course on developments in the UK, it's for the UK to decide what they want to do in the end. They will have to decide the way they want to now settle the issue with the European Union. Things are foreseeing the treaty so there is a procedure so everything is you know foreseen for orderly, orderly negotiation from the present moment. So we have to respect the decision and we have to move on.
JC: The fix?
VC: I hope that Europe understands in particular the euro area in these overall situations has ensured stability and that's very important to keep that and I am sure that examine the consequences of what has happened in particular for the UK, everyone will understand that it is very important to maintain and reinforce and deepen the monetary union in order to ensure the stability of our countries.
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