THE EUROPEAN Central Bank held back from radical intervention ahead of the EU summit yesterday, cutting its key interest rate as expected and announcing new measures to boost euro zone bank liquidity.
The euro posted its greatest slide in two weeks after ECB president Mario Draghi dismissed the prospect of ECB bond-buying.
Instead, he demanded further economic reforms at national level and progress on EU budgetary rules in Brussels before the Frankfurt bank would consider the “further measures” he hinted at last week.
With ongoing disagreement over whether tougher EU budgetary rules will require EU treaty change, Mr Draghi made a plea for a sensible compromise of “credibility and speed” to restore confidence in the euro zone.
“It’s very important to have a credible legal process but it is equally important to have something that is going to be in place soon,” he said, recognising that treaty change could require a lengthy ratification process.
The bank’s governing council agreed new “non-standard measures” to provide unlimited cash to banks for three years, in the expectation that this will be passed on to their customers.
The ECB eased lending rules to allow financial institutions to use “single-A” asset-backed securities or even bank loans as collateral.
Other technical measures were announced, including reducing banks’ reserve ratios to 1 per cent.
After the final governing council meeting of 2011, yesterday’s rate cut was brought on by a dim economic outlook and signs that euro zone uncertainty is spilling over into the real economy.
The ECB president conceded the decision was taken by majority vote rather than being unanimous, after a “lively” discussion regarding the timing more than the extent of the cut.
Amid ongoing financial market uncertainty, the total euro zone economy grew just 0.4 per cent in the last quarter, with the prospect of negative growth in 2012.
Inflation would, Mr Draghi said, remain above the ECB target of 2 per cent for several months but would eventually decline, given modest euro zone wage, price and cost pressures.
Under repeated questioning, he dampened expectations that the ECB was in a legal position to permit, or even turn a blind eye to, roundabout financing of the euro zone via the International Monetary Fund. “The mechanism by which money is being channelled to European countries should not obscure the fact that we have a treaty which says there can be no monetary financing to government,” said Mr Draghi.
“Respect of the spirit of the treaty is always present in our minds. If the IMF were to use this money exclusively to buy bonds in the euro area we think this is not compatible with the treaty.”
He denied the governing council had discussed announcing additional measures after the outcome of the EU summit, nor, he said, did it discuss capping euro zone bond spreads.
“Draghi had no choice but to dampen hopes for more aggressive bond purchases as otherwise he would haven taken away pressure on the EU summit to decide on the necessary reforms of the currency union,” said Jörg Krämer, chief economist at Commerzbank.
Europe’s banking regulator, the European Banking Authority, said yesterday that Europe’s banks had to boost their capital by €114.7 billion to withstand the debt crisis and restore confidence. None of the Irish or UK banks had to raise additional capital, it said, but banks in Germany, Italy, Austria and Belgium had to raise capital.
