FORTUNE -- European Central Bank President Mario Draghi dropped his clearest hint yet that the bank will take action next Thursday to ward off the threat of deflation and support the euro zone's faltering economic recovery.
Speaking in Portugal at an ECB conference, Draghi warned that prices in the countries in the euro zone's stressed periphery were falling too sharply, due to a potent cocktail of belt-tightening and a high exchange rate.
He also cited evidence of a debt trap in stressed countries: the cost of finance for many companies has risen since the crisis, while falling prices mean they can't generate the profits to service their debts.
Draghi said that the share of viable small businesses that can't get a loan is only around 1% in Germany or Austria, but around 25% in Spain and 33% in Portugal.Draghi's speech came after a week of unpleasant surprises for Europe's elite.
After a disappointing set of growth data for the first quarter, the mainstream parties that run most of the euro zone's 18 members have been shaken by a massive protest vote at elections to the EU parliament - a consequence, in part, of the austerity measures they have taken during the euro crisis.
"What we need to be particularly watchful for at the moment is,...the potential for a negative spiral to take hold between between low inflation, falling inflation expectations and credit, in particular in stressed countries," Draghi said.
Markets have been expecting some kind of action at the coming meeting since Draghi's last press conference in May, when he had said that the governing council was "comfortable with acting next time."
The ECB's governing council holds its regular monthly meeting on June 5, and top of the list of expectations is a cut in the key refinacing rate from 0.25%, where it has been since last November.
Some economists also expect it to cut its deposit rate to below zero, effectively penalizing banks for parking excess funds with it. But many doubt that those measures alone will reverse the grinding slow deflation that is taking hold in countries that have been hit hardest by the crisis, such as Greece and Spain.
As such, there's more attention on what the ECB intends to do with its 'unconventional' measures. Draghi indicated that he could well announce a program that would make it easier for banks to lend long-term to businesses in the stressed countries.
That could be in the form of another 'long-term refinancing operation' like the two mammoth operations at the turn of of 2011/2012, or a new bond-buying program--albeit one focused more on asset-backed securities rather than the huge purchases of sovereign bonds that the US, UK and Japan have all employed.
Deeply ingrained opposition from Germany makes it politically difficult for the ECB to buy sovereign bonds, although ECB officials insist that such a step would be legal.
cnn.com
Speaking in Portugal at an ECB conference, Draghi warned that prices in the countries in the euro zone's stressed periphery were falling too sharply, due to a potent cocktail of belt-tightening and a high exchange rate.
He also cited evidence of a debt trap in stressed countries: the cost of finance for many companies has risen since the crisis, while falling prices mean they can't generate the profits to service their debts.
Draghi said that the share of viable small businesses that can't get a loan is only around 1% in Germany or Austria, but around 25% in Spain and 33% in Portugal.Draghi's speech came after a week of unpleasant surprises for Europe's elite.
After a disappointing set of growth data for the first quarter, the mainstream parties that run most of the euro zone's 18 members have been shaken by a massive protest vote at elections to the EU parliament - a consequence, in part, of the austerity measures they have taken during the euro crisis.
"What we need to be particularly watchful for at the moment is,...the potential for a negative spiral to take hold between between low inflation, falling inflation expectations and credit, in particular in stressed countries," Draghi said.
Markets have been expecting some kind of action at the coming meeting since Draghi's last press conference in May, when he had said that the governing council was "comfortable with acting next time."
The ECB's governing council holds its regular monthly meeting on June 5, and top of the list of expectations is a cut in the key refinacing rate from 0.25%, where it has been since last November.
Some economists also expect it to cut its deposit rate to below zero, effectively penalizing banks for parking excess funds with it. But many doubt that those measures alone will reverse the grinding slow deflation that is taking hold in countries that have been hit hardest by the crisis, such as Greece and Spain.
As such, there's more attention on what the ECB intends to do with its 'unconventional' measures. Draghi indicated that he could well announce a program that would make it easier for banks to lend long-term to businesses in the stressed countries.
That could be in the form of another 'long-term refinancing operation' like the two mammoth operations at the turn of of 2011/2012, or a new bond-buying program--albeit one focused more on asset-backed securities rather than the huge purchases of sovereign bonds that the US, UK and Japan have all employed.
Deeply ingrained opposition from Germany makes it politically difficult for the ECB to buy sovereign bonds, although ECB officials insist that such a step would be legal.
cnn.com
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