ECB's Draghi: Spain is 'on the right track'

[February 13, 2013]  MADRID (AP) -- Spain has succeeded in stabilizing a banking system that almost collapsed last year and is well-positioned for better economic times going forward, European Central Bank President Mario Draghi said Tuesday.

Draghi delivered the upbeat assessment to Spanish politicians behind closed doors in Parliament, later telling reporters that "Spain is on the right track."

The country has had to make a host of painful austerity measures and received a bailout package for its banks funded by the eurozone. In exchange for the loans, Spain has been merging, shutting, or nationalizing its weaker banks and requiring them to hold larger capital buffers.

"Today Spanish banks are properly capitalized by and large, so in a position to give credit," Draghi said.

The ECB itself has been instrumental in taming Spain's financial crisis. In August it announced a program to buy the government bonds of countries in need to bring down their borrowing rates. The move scared investors away from betting on Spain's financial collapse -- since the summer, Spain's borrowing rates have dropped sharply and the stock markets rallied.

The economy remains in recession, however, and a recovery is expected to be slow at best.

Though many Spanish individuals and businesses say they are still unable to get loans except to buy property that the banks want to unload from their balance sheets, Draghi said "borrowers who have no debt or little debt are actually able to get credit."

He suggested that borrowers who have existing debt may see their ability to get credit improve toward the end of this year as the 17-nation zone that uses the common euro currency experiences a slow and modest economic recovery.

"We will see credit flows picking up at that time as well," Draghi said.

Draghi praised Spain for passing labor laws making it cheaper for companies to hire and fire workers while acknowledging that the nation is going through deep economic pain with 26 percent unemployment and a much higher rate for adults under age 25. Spain also hiked taxes and made deep cuts to cherished education and national health care.

He didn't comment about Spain specifically when asked if the country needs more reforms but said that all eurozone countries must still outline detailed plans on how they intend to cut government spending and increase revenue.

"This is a complex path and none of the countries in the euro area has finished on these issues," Draghi said.

Draghi's appearance in Parliament became a hot topic in the media after Prime Minister Mariano Rajoy's ruling Popular Party refused to allow the session to be televised and used special equipment to ban cellphone signals, denying liberal lawmakers a chance to tweet the proceedings as they had pledged. Some used their cellphones to tape it so it could be put online later.

Addressing the increasing value of the euro compared to other currencies, Draghi said it is "inappropriate" and "fruitless" for politicians to push the ECB to influence the euro's exchange rate.

French President Francois Hollande last suggested having an exchange rate policy to keep the euro from rising too high, hurting exporters. Draghi noted there have been "comments about the exchange rate from a lot of people" and that "they are inappropriate if they are meant to instruct the ECB to achieve a certain exchange rate."

"They are fruitless and frankly increase the confusion around exchange rates, and frankly we don't need that," Draghi said.

The ECB is forbidden by treaty from taking instructions from politicians. Draghi says the bank doesn't target any particular exchange rate. He said last week, however, that the ECB is monitoring the stronger euro's effects on inflation and the economy -- remarks that investors interpreted as a warning the ECB might someday intervene if the euro rises too steeply.

Some observers have discussed the possibility of a destructive "currency war" in which countries compete at trying to devalue their currencies. Concern over the issue has increased since the new government of Japan adopted policies seen as aimed at lowering the yen.

The euro has risen 20 percent against the Japanese yen in the past 90 days, but Draghi said the world was a long way from a currency war.

"I think the term currency war is way, way overdone," he said. "We are not witnessing anything like that."

[Associated Press; ALAN CLENDENNING]

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