ECB cuts rates before summit to save euro

8th December 2011, Comments 0 comments

The European Central Bank cut its key interest rates here on Thursday just hours before EU leaders met for a crucial summit in Brussels to save the debt-wracked eurozone.

The ECB's governing council, under intense pressure to act, lowered eurozone borrowing costs for the second time in two months, cutting the rate for its main refinancing operations by a quarter of a percentage point to 1.00 percent at the regular monthly meeting here.

The euro immediately firmed to 1.3418 dollars from 1.3380 before the rate decision.

The bank cut eurozone rates to this level in May 2009 where they remained until April 2011.

The ECB's president, Mario Draghi of Italy, who took over at the beginning of November, was scheduled to explain the reasoning behind the decision at his first-ever news conference later.

But the move came as no surprise to ECB watchers following a similar move last month as the debilitating debt crisis pushes the 17 countries to the brink of a new recession.

Draghi was to attend the key meetings in Brussels later.

The high stakes for all EU institution were highlighted dramatically by French President Nicolas Sarkozy who said in Marseille, France, that never had the risks of the EU exploding been so great. There would be no "second chance" if the summit failed to agree a convincing solution, he said.

With the ECB rate cut widely priced in, the markets are waiting to see what other moves the ECB -- which many see as the only body able to contain the crisis -- will take to shore up the debt-wracked euro.

The crucial question is whether the ECB will see view commitments by Germany and France to tighten up eurozone budget discipline as sufficiently convincing to give it extra room for manoeuvre.

Chris Williamson, director and chief economist of Markit in London, said Draghi "is expected to make no commitment today to stepping up its purchases of distressed government bonds, notably Italian debt."

Such purchases would only be forthcoming once the ECB believed that suitable rules and policing mechanisms were in place to ensure that national governments tackle their fiscal deficits, Williamson said.

Jonathan Loynes, chief European economist at Capital Economics, agreed.

"With major uncertainties over just what reforms will be agreed by other member states at the (summit) starting today, it would seem premature to us to expect anything substantial from the ECB at this point," he said.

"Accordingly, given the recent surge in market optimism that a solution to the debt crisis might finally be near, there would seem to be some scope for disappointment from today's press conference."

An announcement by international credit rating agency Standard & Poor's to put the sovereign debt of the entire 27-nation on EU on downgrade watch has ramped up the pressure on Europe's leaders to act.

"The entire world is watching. We must do everything" to save the euro, European Commission chief Jose Manuel Barroso told reporters in the French port city of Marseille.

"It is extremely important that we all together, all the EU, show that the euro is irreversible."

S&P's chief economist for Europe Jean-Michel Six insisted the agency was not working on the basis of an outlook that the single currency area will break up.

The ECB has played fire-fighter to a substantial extent throughout the long and debilitating crisis. But its officials, including Draghi, insist that such a role is only temporary and it is ultimately up to governments to get their finances in order.

There is widespread pressure for the ECB to turn back the crisis by simply printing enough money to buy up a large part of the mountain of debt that many eurozone countries have amassed.

But the bank, strongly backed by Germany, is vehemently opposed to this, which it argues runs against the very rules that the eurozone, and the wider EU, is built on.

Among the so-called "unconventional" measures" the ECB has taken so far to contain the crisis, the central bank has been keeping the region's banks flush with liquidity or cash.

It has also, albeit reluctantly, been buying up the sovereign bonds of countries finding it difficult to drum up financing the usual way via the markets.

Crucially, in comments to the European Parliament last week, ECB chief Draghi signalled flexibility to go beyond those measures, but only if governments credibly removed the threat of moral hazard for non-compliant countries.

Analysts were sceptical, however, whether the ECB would deliver so shortly before the EU summit.

© 2011 AFP

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