Draghi warned his loose policy worsens crisis

Tim Wallace
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INVESTORS fear the Eurozone crisis is not going away, despite European Central Bank boss Mario Draghi’s assurances that he will do everything to help, according to a Fitch study published yesterday.

And analysts from Swiss bank UBS warned Draghi’s policies may be making the crisis worse in the long run by reducing the pressure for troubled governments to reform their damaged economies.

Draghi hopes to ease the massive economic readjustment taking place by holding down interest rates and supporting banks – but analysts fear this simply postpones the inevitable pain, dragging out the crisis.

Earlier this month Draghi insisted his outright monetary transactions (OMTs) – which would see the ECB buy Spanish government bonds if the government asks for a bailout – are “a fully effective backstop that is devised to remove the tail risk for the Eurozone” while “not removing incentives for fiscal discipline”.

But although 86 per cent of investors told ratings agency Fitch the OMTs and banking union are important, 81 per cent say they are not enough to bring an end to the turmoil.

They still fear “significant economic, financial and political risks remain”.

And UBS warned the policies could even be making the crisis worse by reducing incentives for vital reforms.

“In Spain, the OMT has actually reduced pressure to reform and stalled a much needed aid request from the government,” said analyst Matthew Mish.

“Unfortunately, without market stress tough decisions are rarely enacted.”

He added that the ECB is not alone, as the Bank of England’s policies are propping up inefficient “zombie firms” – those who cannot pay off their debts and only survive thanks to low interest rates – thus slowing the economy, and the US Federal Reserve potentially fuelling a dangerous new housing bubble with its loose policies.

“The inherent problem is that central bank policies seem to reward debtors, not creditors,” he said.