all eyes on ecb after eurozone summit deal
Last Updated : GMT 17:04:08
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All eyes on ECB after eurozone summit deal

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Arab Today, arab today All eyes on ECB after eurozone summit deal

Frankfurt - AFP

Europe, with last week's EU summit, appears to have warded off disaster, at least for now, but the markets are now looking to the European Central Bank to ensure the deal is a success, analysts said. Just a week after eurozone leaders clinched a deal they hope will reduce the high borrowing costs suffered by Italy and Spain, as well as boost the banking sector and inject billions into Europe's economy, the ECB is scheduled to hold its regular monthly policy meeting in Frankfurt on Thursday. And central bank watchers believe that at least a cut in interest rates and possibly a new round of liquidity measures will be needed to stop the initial market euphoria that greeted the outcome of the summit from evaporating. "If the summit result encourages the ECB to step in with serious support for sovereign bond markets, it could be a smashing success," said Berenberg Bank chief economist Holger Schmieding. "If instead the ECB holds back, the crisis could possibly escalate badly over the summer until the ECB finally relents," he argued. In recent months, the central bank appears to have grown increasingly reluctant to carry on playing the role of firefighter as the debilitating debt crises stretches into its third year. Since the outbreak of the crisis, the ECB has reversed last year's rate hikes to bring eurozone borrowing costs back down to an all-time low of 1.0 percent and also embarked on a hotly contested programme of indirectly buying up the bonds of debt-mired countries. On top of this, the ECB also pumped more than 1.0 trillion euros ($1.25 trillion) into the banking system to avert a dangerous credit squeeze in the euro area and relaxed the criteria for collateral that banks need to put up to take out loans from the central bank. ECB officials have never ceased to repeat that such measures are merely meant to buy time for governments to tackle the root causes of the crisis -- profligate spending. And in recent months, it has refused to announce any further anti-crisis measures, saying the ball is firmly in the governments' court. Nevertheless, analysts believe the ECB will have to act again, and quickly, if last week's summit deal is to prove a success. "Whether or not it will calm markets for long will likely depend on the ECB," said Berenberg Bank's Schmieding. Allowing the eurozone's bailout funds, the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), to buy Spanish or Italian bonds could deplete their very limited resources, the economist argued. "Official market interventions work if and when they impress markets. Stepping in with limited resources is an invitation to markets to speculate against them," Schmieding said. "If the ECB were to massively support EFSF/ESM interventions, they could be very successful. Over to you, Mr. Draghi," he concluded, referring to ECB President Mario Draghi. ECB watchers already began to lay bets on a cut in interest rates this time round after Draghi held open such a prospect after last month's meeting. "Having only discussed rate cuts at its last meeting, the ECB may now proceed from words to deeds and cut the refi rate to 0.75 percent on Thursday," said Commerzbank economist Michael Schubert. However, further "non-standard measures" such as additional liquidity injections "appear less likely," Schubert said. Firstly, Draghi would want to maintain pressure on governments and banks, the analyst argued. And the full effects of the previous liquidity measures have yet to unfold. Indeed, the ECB published data on Friday showing that eurozone lending to the private sector contracted last month, as the injections of 1.0 trillion euros are still not feeding through into the real economy. Neither is the ECB likely to revive its controversial Securities Market Programme (SMP), under which is bought up more than 200 billion euros of bonds to help bring down borrowing costs for heavily indebted countries. The programme, seen by some as breaking in spirit rules prohibiting the ECB from underwriting government finances, has been dormant since February. And executive board member Benoit Coeure has said the ECB does not see it as the best instrument, because it can neither solve the fiscal problems nor help insolvent banks. Capital Economics economist Jennifer McKeown also believed the ECB "seems unlikely to announce more long-term lending, believing that the financial system as a whole has enough liquidity." But it will opt to cut rates by a quarter of a percentage point, she predicted.

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