European Central Bank says Recovery Underway, is Opportunity to Fix Euro's Troubles

A sustained economic recovery is finally arriving in the 19-country eurozone, European Central Bank head Mario Draghi said Monday - a recovery he says must be used to complete the euro currency union and fix its problems for good.

Draghi said in a speech at a financial forum in Frankfurt that "most indicators suggest a sustained recovery is taking hold" as consumers and businesses grow more confident and banks become more willing to lend.

The head of the chief monetary authority for the shared currency said the upturn was helped by cheaper oil prices and by the central bank's stimulus policies.

The ECB has cut its benchmark interest rate to near zero at 0.05 per cent and launched large-scale purchases of government and corporate bonds with newly printed money to lower longer-term borrowing costs and raise inflation from worrisome low levels. It says it will purchase 60 billion euros a month through September 2016 for a total of at least 1.1 trillion euros ($1.2 trillion) in added monetary stimulus.

Draghi said Monday that member countries should use the breathing space given them by the central bank's stimulus efforts. He said they need to pass tough structural reforms that would make their economies more business-friendly so they can grow and prosper - and to enshrine supervision of such policies at the EU level. The 16-year-old currency union is still struggling to overcome troubles with too much government and bank debt that led to Greece, Portugal, Ireland, Cyprus and Spain needing bailout loans from the other countries. Despite two bailouts, Greece is trying to avoid a debt default that could see it leave the euro. Eurozone unemployment remains high at 11.2 per cent and prices are falling at a 0.3 per cent annual rate.

Draghi said that "a nascent recovery provides us with a window of opportunity, with the conditions to press ahead with reforms that will make the euro area less fragile and vulnerable to shocks."

Eurozone countries must make their economies more productive and "stand on their own two feet" because the eurozone doesn't provide for budget transfers from richer countries - the way U.S. states that suffer recessions can depend on tax transfers through the federal government.

The way to do that was to create new EU institutions in which countries would share sovereignty over their economic policies instead of leaving the responsibility at the national level. Draghi said any such institution would need strengthened democratic oversight and accountability to voters.

He didn't give a detailed picture of what such an institution would look like. The current EU-level reviews of national economic imbalances such as excessive labour costs and trade surpluses "has so far not gained much traction in national decision-making processes."

Draghi praised recent efforts by Spain and Portugal to lower labour costs to businesses - for instance by decentralizing wage negotiations in Spain - had helped those countries begin to recover.

Greece Deal Constitutes Default

A French scheme involving private lenders in a second rescue package for Greece would "likely" amount to a default in the eyes of leading credit rating agency Standard & Poor's, it stated on Monday, in a blow to European efforts to avoid that assessment.

"It is our view that each of the two financing options described in the (French) proposal would likely amount to a default under our criteria," the London-based agency said in a statement.

Such a finding would precipitate a banking crisis, since the European Central Bank has warned that it would then stop accepting Greek bonds as collateral for loans to Greek private banks.

The European Union and International Monetary Fund (IMF) are currently preparing Greece's new bailout - it needs up to 120 billion euros (174 billion dollars) to remain solvent beyond 2012 - after its parliament last week approved prerequisite austerity measures.

Germany and other bailout-weary governments have insisted that the private sector share in the risk this time, unlike in the case of the first 110-billion-euro rescue package.

Under the French proposal, financial institutions would receive new Greek 30-year bonds - representing about 70 per cent of their original holdings - in lieu of debt set for repayment in the short term.

That would give Greece more time to repay its loans, taking some of the pressure off of its troubled economy. The remaining 30 per cent of the debt's value would be paid as cash when the bonds mature.

Banks and insurance companies in France and Germany are among the major investors in Greek debt.

German financial institutions also on Thursday agreed in principle with that country's government to roll over Greek debt under a formula modelled on the French plan, but modified to suit Germany.

Standard & Poor's, however, deemed that the general approach would not lower the risk of Greece going bankrupt in the future and lead investors to receive "less value" than originally promised - thus meeting its criteria for a default.

"Greece's near-term reliance on EU/IMF official financing, the government's difficulty in reducing its sizable fiscal deficit, and the current pricing of Greek government debt in the secondary market all underscore the Hellenic Republic's weak creditworthiness," it said.

It, however, also noted that the French proposal is still being worked on and is "just one" of several approaches being considered.

"We understand that the ... proposal may change, and it is possible that it could take a form that results in a different rating outcome," Standard & Poor's said.

A spokesman for EU Economy Commissioner Olli Rehn on Monday declined to comment on the credit rating agency's findings.

EU finance ministers are expected to "clarify the outline" of the next Greek bailout when they meet on July 11, including the issue of private lenders, he said.

"The precise modalities and scale of private sector involvement... will be determined in the coming weeks," EU spokesman Amadeu Altafaj told reporters in Brussels.

"Exploratory talks have been taking place in Europe. But it's not one size fits all."

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