Below are highlights of comments made by ECB President Mario Draghi in testimony to the European Parliament on Monday.

ON REMIT OF ECB

The treaty specifies very closely what our remit is, namely ensure price stability in the medium term. The treaty also forbids monetary financing and ... we want to act within the treaty. I think that to take any other behavior, that would somehow, breach the treaty would also negatively effect the credibility of our institution.

ON BANKS' FUNDING CONSTRAINTS

We know that banks experience now and will be experiencing, even more so, a very significant funding constraint, especially in the first quarter of 2012.

Not only then. The whole year is going to be a difficult year for the banks.

What we certainly want to avoid is that serious severe credit tightening that could induce a further slowdown of growth and a possible recession. We want to avoid that. If we can relieve the funding pressures, that's already a good part of our answer.

ON CREDIT RATING AGENCIES

The two issues that are of particular importance are, first, the assurance of appropriate underlying methodologies and the transparency of ratings. And second, the reduction of hard-wiring of ratings in legislation and market practices.

Ratings simplify complex risk assessment. But they should only be one of several inputs for investors as well as regulators. In particular, they should be no substitute for financial institutions and other investors to carry out their own assessment. This is the main step towards avoiding mechanistic reliance on external credit ratings.

The Eurosystem does not mechanically rely on these assessments as it is aware of the limitations of these methodologies. It reserves the right to reject or limit the use of an asset on the basis of any information on its credit quality that it may consider relevant. The Eurosystem has applied such discretion to temporarily suspend the application of the minimum rating requirement to debt instruments issued or guaranteed by some euro area governments following the EU-IMF adjustment programs.

We should ask ourselves the most important question. How would we do without ratings? What can we do to replace the ratings of credit rating agencies? Because we want to have a much more complete set of credit assessment than just the one we have today, based exclusively on rating agencies' credit ratings. The question is now concrete steps that we can undertake in order to reduce the reliance on the ratings of credit rating agencies.

ON AUSTERITY

I have no doubt that austerity implies contraction.

What we want is that this contraction to be short-term and we want to activate all the channels that would enable confidence to return to markets, spreads to go down, costs of credit to go down, ultimately for job-creation to take off.

You need to have this austerity, you need to have control of your budgets.

ON MONETARY FINANCING

We want to act within the treaty. The ECB cares about financial stability, a lot, but it has to be done without weakening the credibility of the institutions.

ON THE EURO ZONE'S EFSF TEMPORARY BAILOUT FUND AND PERMANENT

ESM FUND:

The EFSF stands ready to act and the fact that the ECB is putting at the disposal of the EFSF its infrastructure, its know-how, should reassure that when the time comes it is ready to supply the necessary resources.

...There is now greater flexibility in euro area crisis mechanisms to act as backstops thanks to the decision to accelerate the entry into force of the European Stability Mechanism, the ESM, to July 2012, and for the European Financial Stability Facility to remain active in financing programs that have started until mid-2013.

Second, the clarification that as regards private sector involvement, the euro area will adhere to established IMF practice, is also very helpful in reassuring investors.

Third, the decision to include an emergency procedure into the voting rule of the ESM, though subject to approval by the Finish parliament, is essential for effective decision making procedure especially in crisis situations.

ON THE EURO

I have no doubt whatsoever about the strength of the euro, about its permanence, about its irreversibility. Let's not forget, this was a key word at the time of the Maastricht treaty. The one currency is irreversible.

You have a lot of people, especially outside the euro area, who really spend a lot of time in what I think is morbid speculation, namely, what happens if? What happens if? And they all have catastrophic scenarios for the euro area.

EU SUMMIT DECISIONS

We welcome the decisions of the heads of state or government of the euro area to strengthen the EFSF and the ESM in a number of areas.

There is now greater flexibility in the euro area crisis mechanisms to act as backstops.

The clarification that as regards private sector involvement, the euro area will adhere to established IMF practice is also helpful in reassuring investors.

The decision to include an emergency procedure into the voting rules of the ESM is essential for effective decision-making procedures, especially in crisis situations.

ECB CRISIS SUPPORT MEASURES

The ECB has taken a number of steps to ensure that it will continue to deliver price stability in the medium term in an environment that remains challenging.

These steps relate both to changes in our interest rate and to non-standard measures.

Such measures should prevent adverse effects on the monetary policy transmission mechanism stemming from the ongoing tensions in parts of the euro area financial markets. They should in particular mitigate the effects of strains in financial markets, on the supply of credit to firms and households.

Overall, all measures aim to ensure enhanced access of the banking sector to liquidity and facilitate the functioning of the euro area money market, thereby avoiding serious limitations to the real economy from lack of financing possibilities.

We have decided on three-year refinancing operations to support the supply of credit to the euro area economy. These measures address the risk that persistent financial market tensions could affect the capacity of euro area banks to obtain refinancing over long horizons.

ON EURO ZONE FISCAL COMPACT

The new fiscal compact is an essential signal, showing a clear trajectory for the future evolution of the euro area. It frames expectations of both citizens and financial markets.

Enshrining strict rules in primary legislation, making them enforceable by the European Court of Justice: all of this should contribute to making public finances in the euro area credibly robust. The ECB welcomes this outcome.

The foundations for a fiscal compact have been laid.

EURO ZONE ECONOMIC OUTLOOK

Euro area economic activity should recover, albeit very gradually, in the course of 2012.

Inflation is likely to say above 2 percent for several months to come, before declining to below 2 percent.

Given the environment of weaker growth in the euro area and globally, underlying cost, wage and price pressures in euro area should also remain modest.

Risks to the medium-term outlook for price developments remain broadly balanced.

For full speech click on:

http://www.ecb.europa.eu/press/key/date/2011/html/sp111219_1.en.html

(Reporting by Marc Jones, John O'Donnell and Robin Emmott; editing by Ron Askew)

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