When: Today, December 6th
Where: CNBC’s Business Day Programming
Following is the unofficial transcript of a CNBC Exclusive interview with Lorenzo Bini Smaghi, ECB Executive Board Member, today, December 6th on CNBC’s Business Day Programming.
All references must be sourced to CNBC.
LORENZO BINI SMAGHI: Since the Second World War, so only 10 years after the birth of the euro we are facing big tests. I think the actions that we have taken proved that the Euro is resilient and the authorities want to make it resilient.
STEVE LIESMAN: Do you worry about the future of the Euro?
LORENZO BINI SMAGHI: I think we are taking the right decisions. There is an issue about confidence which is more general, more global, a global issue. But clearly the Euro is young so it has been tested more than others.
STEVE LIESMAN: What I hear from several officials outside the Euro area and even some inside say that the problem has been that the officials, the Euro, the ECB, the Eurozone finance ministers are always a step behind the market. Is that a fair criticism?
LORENZO BINI SMAGHI: I actually think that it depends on the issue. On fiscal consolidation we are behind the market and this is true we are waiting for markets to push countries to consolidate. But to some extents this takes place earlier than other countries and areas outside of the Euro because monetary policy is not financing and monetizing the debt and this forces countries to face the markets earlier than non-euro area countries and this of course is difficult for these countries but to some extent it puts them in a position to address these issues earlier than other countries that will have to face this issue about consolidation later.
STEVE LIESMAN: But the history is that Greece has became a big problem, and the facility was created. Then Ireland became a problem now others are a problem and the concern is that there is not a facility to deal with a wider problem yet. Does one need to be put in place?
LORENZO BINI SMAGHI: Well we have shown that we can create a safety net sufficient to address the situation and if needed this facility needs to be increased. I think that we will have to discuss this if needed. For now there is enough money to address the problems
STEVE LIESMAN: The IMF is saying that the size of the facility needs to be increased. What is your reaction to that?
LORENZO BINI SMAGHI: Well if needed, if needed. Now we’re using only a part but if needed it should be increased of course.
STEVE LIESMAN: But that then gets to the issue of whether or not it’s proactive or not. If you wait until it’s needed isn’t it too late at that point?
LORENZO BINI SMAGHI: Well, it’s a question of being credible in the eyes of the market. If you make it very big. .
STEVE LIESMAN: In the short history of the Euro, where would you say we are right now? Is this a severe test of the Euro? Is this one of the most severe? Or is it just normal course of business?
LORENZO BINI SMAGHI: Well, it's not normal business because this is the biggest crisis, the most severe crisis all of advanced economies have been facing since the second world war. So, only ten years after the birth of the Euro, we are facing this big test. I think the-- the actions, which have been taken prove that the Euro is resilient and the authorities want to make it resilient.
STEVE LIESMAN: Do you worry about the future of the Euro?
LORENZO BINI SMAGHI: I think we-- we're taking the-- the right decisions. There is an issue about confidence, which is more general, a global issue. Clearly the Euro is young, so it is being tested more than other.
STEVE LIESMAN: The-- what I hear from several officials outside the Euro Area, and even some inside say that the problem has been that the officials, the Euro, the ECB, the Euro Zone, finance ministry, they're always a step behind them. Is that a fair criticism?
LORENZO BINI SMAGHI: I actually think that-- depends on the issue. On-- on fiscal-- consolidation-- we are behind the market-- waiting for the markets to push countries to consolidate. But to some extent, this takes place earlier than other-- countries and areas outside the Euro. Because monetary policy is-- is not financing and monetizing the debt. And this forces countries to face the market earlier than-- non-Euro area country And-- and this, of course, is-- is difficult-- for these countries. But so, to some extent it takes- it puts them in a position to address issues-- earlier than-- than other countries-- that we have to face this issue about consolidation. later.
STEVE LIESMAN: But the history is that Greece became a huge problem. And a facility was created. Then Ireland became a problem and then maybe now others are a problem. And the-- the concern is that there is not a facility to deal with the wider problem here. Does one need to be put in place?
LORENZO BINI SMAGHI: Well, we have shown that we can-- create a safety net sufficient to-- to address the situation. And if needed-- this is-- facility needs-- to be increased. And-- I think that it-- we would have to re-discuss this if needed. Well, now there is enough money to address problems.
STEVE LIESMAN: The I.M.F. is saying that the size of the facility needs to be increased. What is your reaction to that?
LORENZO BINI SMAGHI: Well, if needed, if needed. For now we're using only using a part, but if needed and if needed-- it should be.
STEVE LIESMAN: But that really gets to the issue of whether or not the-- it's proactive. Wait until it's needed. Is it too late at that point?
LORENZO BINI SMAGHI: Well, I mean, it's a question of being credible-- in the eyes of the markets. If you make it very big-- in the markets. And they want to test it. I-- I think it's-- we just have to make the right decisions at the right time, which may be a bit earlier than what has been done so far.
STEVE LIESMAN: Would the European Central Bank be willing to do more to help stabilize the Euro? If the finance ministers and the fiscal authority did more?
LORENZO BINI SMAGHI: Well, we are doing a lot already. I think we are implementing our-- our policies. And the stability of the Euro is a key objective. And we have implemented monetary to ensure price stability the average of ten years is slightly below two percent. So, we're on target. And we continue to do that. And we have to-- to make sure that the governments bear their own responsibility. And we will do our part.
STEVE LIESMAN: Could you explain for the American audience, what the ECB is doing to help the government bond markets here compare to what the United States is doing? How are they different?
LORENZO BINI SMAGHI: Well, they are different because-- they are different because-- in the U.S., they're buying bonds to increase liquidity. To make sure that liquidity is getting to the end users. There's a big problem in terms of transmission of the liquidity to-- to the end uses. In Europe, it's very different, because the liquidity is getting to-- to the end user. You see credit is increasing again. Bank lending is increasing. But in some countries-- markets are not functioning, because there's a loss of confidence with the government bond. So, we are purchasing certain government bond but we are still realizing the impact on-- on the liquidity. So, this is not an instrument to just create liquidity. It is instrument to improve the way in which monetary policy operates.
STEVE LIESMAN: So, it's not quantitative easing here in Europe.
LORENZO BINI SMAGHI: It's not quantitative easing. It was a selective-- intervention to improve the functioning of the-- of the bond markets.
STEVE LIESMAN: And it's not quantitative easing, because there's no quantity increase of the total amount of reserves or money supply.
LORENZO BINI SMAGHI: No, the-- the increase-- of the liquidity is sterilized week by week, so we make sure that basically we are not printing money to buy bonds. The money that we add to the economy is being sterilized every week.
STEVE LIESMAN: And is that the plan to continue to do—
LORENZO BINI SMAGHI: Yes.
STEVE LIESMAN: --sterilized interventions?
LORENZO BINI SMAGHI: Yes, yes. We want to maintain the control of the money creation.
STEVE LIESMAN: Well, how do you respond to critics who say that what the ECB should do is more like what the United States federal reserve is doing?
LORENZO BINI SMAGHI: Well, as I said, we are in a different situation from the U.S. If you look at the credit to the real economy, both households, and companies, it’s growing it’s starting to grow again. And-- companies. It's-- it's growing. It's starting to grow again. Which is not the situation in the U.S. It is why monetary policy in the U.S. has to be much more-- much stronger and-- and-- and really-- go across the borders in purchasing assets .
STEVE LIESMAN: So, it sounds like you understand or-- or even agree with what the United States Central Bank
LORENZO BINI SMAGHI: Well, we are confident that they'll do the right thing for the U.S.
STEVE LIESMAN: And do you worry about the inflationary impact, perhaps, spilling over to Europe? The European Zone.
LORENZO BINI SMAGHI: There is a lot of spillover effect. Part of the spillover is in lieu of the fact that many-- emerging markets are-- are intervening-- in their own-- countries-- to avoid the exchange rate appreciates, so this multiples the liquidity in their own country. So, to some extent, it's their responsibility to allow the exchange rate to appreciate.
STEVE LIESMAN: But do you worry about the inflationary spillover into the Euro Zone?
LORENZO BINI SMAGHI: No, we really don't see inflation impact in the Euro Zone. Inflation is-- less than two percent. And it's projected to stay there. Expectations are well anchored. So, we don't see inflation. And we don't see deflation, by the way.
STEVE LIESMAN: You don’t have a deflation concern either?
LORENZO BINI SMAGHI: No.
STEVE LIESMAN: There were some short term facilities that people thought I believe in early November were going to expire. And you were going to get rid of essentially the non-standard monetary policy measures. It looks like that's been on ho-- been put on hold right now. What is the outlook for the nonstandard monetary policy measures?
LORENZO BINI SMAGHI: Well, this-- these measures we always said it will depend on circumstances. We never committed to specific dates. I think-- clearly circumstances have changed in the last two weeks. So, we-- we think we need to maintain these new measures for another 3 months. And we’ll see.
STEVE LIESMAN: And so, there are three-month timetables that you do. When you come back again, it will be what now in February or so? Or January? Revisit that?
LORENZO BINI SMAGHI: Well, we'll revisit that in-- february, march.
STEVE LIESMAN: One of the things we're doing here is we're trying to figure out how-- how much Germany will do to back up the Euro. Do-- do you think there's a danger that Germany could be p-- pushed too far-- in terms of the political situation and the feelings of the general public? In terms of the need for them to-- help bail out the rest of Europe?
LORENZO BINI SMAGHI: No, I don't think so. I mean-- Germany is-- is part of this safety net like all the countries. Lending to Greece, to Ireland, like everybody else. Maybe there is a sense in Germany that they're doing more than the others, but-- basically it’s on a pro-rata basis. I think it's-- in the interest of Germany, as all the other countries, if the Euro is stable. Germany is-- typically a net capital exporter. So, it needs to invest abroad. Because it's a high-saving country. So, it's good to have a broader area where to invest in a safe way. So, our financial stability is very important I think for Germans.
STEVE LIESMAN: One of the things that have come from the Germans, I guess among others, is this idea of a haircut for sovereign lenders-- beginning in 2013. What is the status of that proposal? Is that still a proposal that lies on the table now?
LORENZO BINI SMAGHI:I mean, we have agreed now, on this. The heads of state have agreed, I think, on-- on what we consider-- as the only viable solution, which is that the Euro Area is treated like any other-- area…that-- haircuts only take place in extreme circumstances when a country's insolvent. But-- like many other countries which receive I.M.F. assistance and the assistance of the other partners-- there won't be any haircut at that point.
STEVE LIESMAN: You warned when this proposal first surfaced that it would cause the spreads of the developing or less secure nations to widen. You were correct about that.
LORENZO BINI SMAGHI: Well-- markets don't like uncertainty. So-- when-- when we-- when we-- the heads of state started discussing about that. We thought it would be very dangerous to discuss in the air, openly, without having a clear proposal. So, it took-- about a month to finally agree on-- on the proposal. And during these moments, markets were just-- crazy, because we didn’t understand what was going on.
STEVE LIESMAN: Do you feel like now the markets accept the proposal that's out there? And it's not one that creates higher spreads?
LORENZO BINI SMAGHI: I think it-- it takes time. And some markets are still thinking about what does it mean? 2000—13, these collection action causes which by the way were-- agreed in 2003-- after the Asian crisis. That all countries would have this kind of collection action clause to-- to serve as an example for emerging markets. Now it turns out that advanced economies need it. But these will be things that are used only in very extreme circumstances. And I don't believe that we-- it would be used in Europe.
STEVE LIESMAN: Mr. Tremonti this morning is out discussing the idea of E bonds. What is your reaction to the concept of an E bond?
LORENZO BINI SMAGHI: Well-- these are-- new ideas which have been thought for some time. But-- not yet-- clear from a technical point of view how they will work. And where will tax payers be on thid bond? And we don't have European tax figures either. Maybe one day we will have that, I feel. You know, in Germany, they say that, you know, "We need time to think about that."
But-- we are not yet, you know, in a federal system where all the taxes are pooled together to back these bonds. Maybe one day. You know, it's useful to think about these issues. Right now-- for the next few weeks and months, I think we need to make sure that all countries implement the fiscal consolidation. Are credible in the eyes of the market. And if you look at the aggregate of Europe, our deficit is-- six percent. Less than six percent. And it's coming down year after year.
So, we're ahead of other countries. Of course, within the Euro Area, some are-- are-- are behind. But if you look at those who are behind, they are-- they are below other-- other-- to countries like the U.S. or Japan and U.K. So, I think Europe is getting out of the fiscal problem ahead of all those. In a difficult time. And-- there's no doubt that at the end of the tunnel—we will get, at the end of the tunnel before the others.
STEVE LIESMAN: One benefit, it seems to me, is that you are facing these problems while in countries like Germany, growth is quite strong. Could-- could you give me your outlook for the Euro Area? And maybe split it up into those who are the-- the better countries and the worst countries. How you-- how you see the outlook shaping out
LORENZO BINI SMAGHI: Well, we're in a situation which is the opposite; it's the first ten year. Where the core of say Germany, France, and a little bit…Italy, were growing less than-- than those in the periphery And now we have a reverse situation where Germany is growing quite strongly. France is growing-- is-- is growing strongly and other countries are going strongly. And this will help those countries—who have to make the adjustments.
To-- to make the adjustments to make the adjustments in a better environment. But it’s not gonna be easy-- not always gonna be easy, but they have a better environment. And Germany's growing and importing more. It's a more balanced-- more balanced growth because domestic demand is also improving. Unemployment is coming down in Germany, quite strongly. So, consumption is-- is picking it up. And you may see this-- they see these in-- in the streets of Germany and people are-- are not feeling the crisis.
STEVE LIESMAN: Lorenzo, when American investors come in, in the mornings, they're now always looking at the news from Europe. They're looking at the Euro. They're looking at the latest news on the-- bailout and the rescue packages. What could you tell them about the future here? Is this something that's going to be gotten under control? Or is it something that you think's gonna be continued-- a source of volatility to keep checking your Euro news here?
LORENZO BINI SMAGHI: Well, you know, the Euro news make the news, because it's sixteen countries talking to each other. 16 parliaments, 16 governments. And the markets in all of this-- gets very nervous thoughts about this. It’s very difficult to distill the-- the right news from the noise. But I think the right news is that-- governments are committed to put their own house in order. To—help the system-- survive this crisis.
And you should take the decisions which have been taken-- over the last six months, nine months. They have been late. They have been clumsy. But they have been-- they have been taken. Have they been taking the right direction? So, I-- I think if you have to extrapolate the trend-- I think it's a trend towards-- more stability.
STEVE LIESMAN: So, would you say that if it's found that a lager package is needed, you'll feel confident that the fiscal authorities will come up and agree to a larger package?
LORENZO BINI SMAGHI: Well, I think so. If this is in-- in the interest of the stability of the Euro, this-- this could be-- this would be done.
STEVE LIESMAN: But you're not saying for sure that you agree one is needed?
LORENZO BINI SMAGHI: No, I think one is-- if one is needed, it has to be decided. Of-- of course, the earlier the better. And-- and I think that's-- that's-- important for the heads of states and the governments to-- to think about that ahead of time.
STEVE LIESMAN: Yeah, but I just want to be clear about what you think needs to be done now. Do you-- do you-- are you ready to say now that you believe a larger package is needed?
LORENZO BINI SMAGHI: Well, we don't have-- countries accounting for that. For-- for the new facility. So, if there are no new countries, the package is fine. But-- if there are new countries, we have to be ready to increase it.
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