ECB cuts interest rates to record low of just 1%
Source: Agencies |
December 9, 2011, Friday
|
Print Edition
Print Edition
THE European Central Bank acted to soften a looming recession and avert a credit crunch by cutting interest rates and offering banks long-term funds yesterday as EU leaders prepared for a summit that could determine the fate of the eurozone.
But ECB President Mario Draghi said there was no plan for large-scale government bond purchases, as markets had been hoping.
He discouraged expectations that the bank would massively step up buying government bonds if European Union leaders agree on moves towards closer fiscal union at the Brussels summit.
He said the eurozone's EFSF rescue fund should remain the main tool to fight bond market contagion, despite the limits of its leverage, and added it was illegal for the ECB or national central banks to lend money to the IMF to buy eurozone bonds, appearing to veto one firefighting option under active consideration.
To counter that, he announced unprecedented action to support Europe's cash-starved banks with three-year liquidity tenders and easier collateral rules and cut interest rates back to a record low of just 1 percent.
The euro and European shares dived as markets, increasingly convinced only the ECB has the power to protect the eurozone, focused on what Draghi was cool about rather than the measures he announced.
"One step forward, two steps back," said Alan Clarke, UK and eurozone economist at Scotia Capital. "The eurozone leaders might as well not bother. Pack their bags, go home, enjoy the weekend and do their Christmas shopping."
The ECB cut its main rate by a quarter point and flagged a strong chance of recession next year. Draghi admitted the central bankers had been divided on that decision.
"The intensified financial market tensions are continuing to dampen economic activity in the euro area and the outlook remains subject to high uncertainty and substantial downside risks," he told reporters.
French President Nicolas Sarkozy dramatized the danger facing the 17-nation single currency area hours before their eighth crisis summit of the year in a speech to European conservative leaders in Marseille.
"Never has the risk of Europe exploding been so big," he told leaders including German Chancellor Angela Merkel and the heads of the EU institutions.
"The diagnosis is that the euro, which should inspire confidence, is not inspiring this confidence," he said. "If there is no deal on Friday, there will be no second chance."
France and Germany used the Marseille meeting to lobby for their plan to amend the European Union treaty to toughen budget discipline, which they want to have it ready by March. But several countries are skeptical of full-blown treaty change.
Merkel said she was convinced leaders would find a solution to the euro crisis at the summit.
A Reuters poll of economists found that while 33 out of 57 believe the eurozone will probably survive in its current form, 38 expect this week's summit will fail to deliver a decisive solution to the debt crisis.
US Treasury Secretary Timothy Geithner, winding up a visit to Europe to urge decisive action, said the world could be encouraged by the eurozone's progress in the past few weeks.
It was essential for European leaders to strengthen their financial firewall to give economic reforms a chance to work, he said after talks with new Italian Prime Minister Mario Monti in Milan.
But ECB President Mario Draghi said there was no plan for large-scale government bond purchases, as markets had been hoping.
He discouraged expectations that the bank would massively step up buying government bonds if European Union leaders agree on moves towards closer fiscal union at the Brussels summit.
He said the eurozone's EFSF rescue fund should remain the main tool to fight bond market contagion, despite the limits of its leverage, and added it was illegal for the ECB or national central banks to lend money to the IMF to buy eurozone bonds, appearing to veto one firefighting option under active consideration.
To counter that, he announced unprecedented action to support Europe's cash-starved banks with three-year liquidity tenders and easier collateral rules and cut interest rates back to a record low of just 1 percent.
The euro and European shares dived as markets, increasingly convinced only the ECB has the power to protect the eurozone, focused on what Draghi was cool about rather than the measures he announced.
"One step forward, two steps back," said Alan Clarke, UK and eurozone economist at Scotia Capital. "The eurozone leaders might as well not bother. Pack their bags, go home, enjoy the weekend and do their Christmas shopping."
The ECB cut its main rate by a quarter point and flagged a strong chance of recession next year. Draghi admitted the central bankers had been divided on that decision.
"The intensified financial market tensions are continuing to dampen economic activity in the euro area and the outlook remains subject to high uncertainty and substantial downside risks," he told reporters.
French President Nicolas Sarkozy dramatized the danger facing the 17-nation single currency area hours before their eighth crisis summit of the year in a speech to European conservative leaders in Marseille.
"Never has the risk of Europe exploding been so big," he told leaders including German Chancellor Angela Merkel and the heads of the EU institutions.
"The diagnosis is that the euro, which should inspire confidence, is not inspiring this confidence," he said. "If there is no deal on Friday, there will be no second chance."
France and Germany used the Marseille meeting to lobby for their plan to amend the European Union treaty to toughen budget discipline, which they want to have it ready by March. But several countries are skeptical of full-blown treaty change.
Merkel said she was convinced leaders would find a solution to the euro crisis at the summit.
A Reuters poll of economists found that while 33 out of 57 believe the eurozone will probably survive in its current form, 38 expect this week's summit will fail to deliver a decisive solution to the debt crisis.
US Treasury Secretary Timothy Geithner, winding up a visit to Europe to urge decisive action, said the world could be encouraged by the eurozone's progress in the past few weeks.
It was essential for European leaders to strengthen their financial firewall to give economic reforms a chance to work, he said after talks with new Italian Prime Minister Mario Monti in Milan.
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