The European Central Bank’s main interest rate has been cut from 0.05% to 0% as part of a package of measures intended to revive the eurozone economy.
The ECB will also expand its quantitative easing program from €60 billion to €80 billion a month.
The bank also decided to further cut its bank deposit rate, from minus 0.3% to minus 0.4%.
The measures, including the decision to cut the main interest rate, were more radical than investors had expected.
The stimulus measures announced three months ago have largely failed to drive economic growth higher or boost inflation.
ECB president Mario Draghi told a news conference in Frankfurt that it had cut eurozone inflation projections to reflect the recent decline in oil prices.
The bank now expected inflation to be just 0.1% this year – substantially lower than the previous estimate of 1% and underlining the need for the bank to go further than expected.
Inflation should rise to 1.3% in 2017 and 1.6% the following year, according to its estimates.
“We are not in deflation,” Mario Draghi stressed.
He also warned that risks to economic growth across the 19 countries that use the euro remained “tilted to the downside”.
The ECB cut its growth forecasts to an increase of 1.4% in 2016 – down from 1.7%; 1.7% for 2017 – down from 1.9%; and 1.8% for 2018.
The governing council expected the bank’s key interest rates “to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases”.
The bond-buying program will continue at least until the end of March 2017.
As well as government debt, the ECB will now be allowed to use its newly printed money to buy bonds issued by companies as well. That scheme will start towards the end of the second quarter this year.
The euro initially fell 1% against the US dollar, but soon recovered to be trading higher and was also up against the yen. A weaker euro makes European exports cheaper, so the rise will not be welcomed by manufacturers.
European stock markets also rose sharply following the announcement before losing much of those gains, with Frankfurt up 0.6% and Paris rising 1%, although the FTSE 100 in London fell 0.2% and Wall Street was flat in morning trading.
Shares in European banks posted gains, with Deutsche Bank rising 4.8%, Societe Generale adding 2.7%, Santander up 5.5% and Italy’s UniCredit adding 6.8%.
The European Central Bank (ECB) has unveiled an €1.1 trillion ($1.3 trillion) plan to boost eurozone economy.
The ECB will buy bonds worth €60 billion ($72 billion) per month until the end of September 2016 and possibly longer, in what is known as quantitative easing (QE).
The bank has also said eurozone interest rates are being held at the record low of 0.05%, where they have been since September 2014.
ECB president Mario Draghi said the program would begin in March.
The eurozone is flagging and the ECB is seeking ways to stimulate spending.
Earlier this month, figures showed the eurozone was suffering deflation, creating the danger that growth would stall as businesses and consumers shut their wallets, as they waited for prices to fall.
Mario Draghi said the program would be conducted “until we see a sustained adjustment in the path of inflation”, which the ECB has pledged to maintain at close to 2%.
He told a news conference the ECB would be purchasing euro-denominated investment grade securities issued by euro-area governments and agencies and European institutions.
However, “some additional eligibility criteria” would be applied in the case of countries under an EU and International Monetary Fund (IMF) adjustment program.
The value of the euro fell following Mario Draghi’s announcement, falling by more than a cent against the US dollar to $1.1472.
Lowering the cost of borrowing should encourage banks to lend and eurozone businesses and consumers to spend more.
It is a strategy that appears to have worked in the US, which undertook a huge program of QE between 2008 and 2014.
The UK and Japan have also had sizeable bond-buying programs.
Mario Draghi said the ECB’s own program had been taken “to counter two unfavorable developments”.
“Inflation dynamics have continued to be weaker than expected,” he said, with most inflation indicators at or close to historical lows.
“Economic slack in the euro area remains sizeable and money and credit developments continue to be subdued,” he added.
At the same time, it was necessary to “address heightened risks of too prolonged a period of low inflation”.
Mario Draghi said there had been a “large majority” on the ECB’s governing council in favor of triggering the bond-buying program now – “so large that we did not need to take a vote”.
Up until now, the ECB has resisted QE, although Mario Draghi reassured markets in July 2012 by saying he would be prepared to do whatever it took to maintain financial stability in the eurozone, nicknamed his “big bazooka” speech.
Since then, the case for quantitative easing has been growing.
In advance of the ECB’s announcement, there had been speculation that the central bank would not actually buy any bonds itself, but would invite the central banks of eurozone member governments to do so.
In the event, Mario Draghi said only 20% of the new asset purchases would require national central banks to shoulder risks outside their own borders.
The euro has reached a nine-year low against the US dollar as investors predicted the European Central Bank (ECB) may act to stimulate the economy.
The European currency fell by 1.2% against the dollar to $1.1864, marking its weakest level since March 2006, before recovering slightly to $1.19370.
The drop follows ECB president Mario Draghi’s comments indicating the bank could soon start quantitative easing (QE).
Greek political turmoil also weighed on the currency.
Although the ECB has already cut interest rates to a record low level, and also bought some bonds issued by private companies, a full-scale program of QE has not yet been launched.
On January 2, Mario Draghi hinted in a newspaper interview that the ECB might soon start a policy of QE by buying government bonds, thus copying its counterparts in the UK and US.
The purpose would be to inject cash into the banking system, stimulate the economy and push prices higher.
In an interview with German newspaper Handelsblatt, Mario Draghi said: “We are making technical preparations to alter the size, pace and composition of our measures in early 2015.”
Political turmoil in Greece also weighed on the euro, with fears that the general election on January 25, could see the anti-austerity, left-wing Syriza party take control of the country.
The possibility has sparked fears about whether Greece will stick to the terms of its international bailout and stay in the eurozone.
On January 3, German magazine Der Spiegel magazine said Germany believes the eurozone would be able to cope with a Greek “exit” from the euro, if the Syriza party wins the Greek election.
Reacting to the Der Speigel report, a spokesman for German Chancellor Angela Merkel said there was no change in German policy and the government expects Greece to fulfill its obligations under the EU, ECB and IMF bailout.
France’s President Francois Hollande also commented, saying it was now “up to the Greeks” to decide whether to remain a part of the single currency.
“Europe cannot continue to be identified by austerity,” Francois Hollande added, suggesting that the eurozone needs to focus more on growth than reducing its deficit.
Analysts said the euro was likely to remain volatile for the next few weeks.
The European Central Bank (ECB) has announced new measures aimed at stimulating the eurozone economy, including negative interest rates and cheap long-term loans to banks.
The ECB cut its deposit rate for banks from zero to -0.1%, to encourage banks to lend to businesses rather than hold on to money.
It also cut its benchmark interest rate to 0.15% from 0.25%.
The ECB is the first major central bank to introduce negative interest rates.
It has been tried before in smaller economies. Sweden and Denmark, who are both outside the Single Currency, attempted to use negative rates in recent years with mixed results.
Analysts said in Sweden it had little discernible impact; in Denmark it did have the effect of lowering the value of the currency, the Krone, but according to the Danish Banking Association it also hit the banks’ bottom line profits.
The ECB’s president, Mario Draghi, also announced other measures.
Long term loans are to be offered to commercial banks at cheap rates until 2018. These loans would be capped at 7% of the amount that the individual banks in question lend to companies. Thus, the more the banks lend to companies, the more money they can borrow cheaply from the ECB.
The ECB cut its benchmark interest rate to 0.15 percent from 0.25 percent
It is also doing preliminary work that could lead to buying bundles of loans that are made to small businesses in the form of bonds. This is being seen as a step towards providing companies with credit through the financial markets.
Mario Draghi said the ECB’s policymakers unanimously agreed to consider more unconventional measures to boost inflation if it stays too low. The ECB stopped short of instituting a large asset-buying program like the quantitative easing (QE) undertaken by the US Federal Reserve. However. Mario Draghi insisted that more would be done, if necessary.
“Are we finished? The answer is no. We aren’t finished here. If need be, within our mandate, we aren’t finished here.” he said.
Mario Draghi said that the whole package of measures was aimed at increasing lending to the “real economy”.
“Now we are in a completely different world,” he said.
Even though some of the measures, like the more to negative rates on deposits, were expected European shares moved higher on the ECB announcement.
The benchmark German DAX 30 index jumped above the 10,000 level for the first time. The CAC 40 in Paris was up 0.8% shortly after the ECB’s comments.
Meanwhile, the euro fell to $1.3558, its lowest level in four months.
Although the danger of deflation in the eurozone is limited, the ECB is concerned that growth is very sluggish and bank lending weak – both of which could potentially derail the fragile economic recovery.
The eurozone economy grew by just 0.2% in the first quarter of the year. Consumer spending, investment and exports are all growing at a slower pace than this time last year.
Inflation in the eurozone fell to 0.5% in May, down from 0.7% in April. This is well below the European Central Bank’s target of just below 2%.
If the eurozone slips into deflation, the fear is that consumers might spend even less because they would expect prices to fall in future months. For the same reason investors could stop investing.
Growth would then be hit and demand would be severely constrained. The large debts amassed by the eurozone’s countries, companies and banks would take longer and be harder to pay off.
Unemployment, which is already at nearly 12% in the eurozone, and much higher in places like Spain, Portugal and Greece, could get even worse.
Mario Draghi emphasized that recovery in the eurozone was not just in the hands of the ECB, but also in the domain of the banks and the governments. He said the banks needed to play their part by increasing lending and reforms by national governments should be carried through.
“In order to strengthen the economic recovery, banks and policy-makers in the euro area must step up their efforts. Banks should take full advantage of this exercise to improve their capital and solvency position, thereby contributing to overcome any existing credit supply restriction that could hamper the recovery.”
“At the same time, policymakers in the euro area should push ahead in the areas of fiscal policies and structural reforms,” he added.
The European Central Bank (ECB) has decided to cut its benchmark interest rate to a new record low amid ongoing worries about the eurozone’s economy.
The widely-expected cut to 0.50% from 0.75% is the first in 10 months.
Worries about eurozone economies were underlined on Thursday with data showing manufacturing activity across the 17-nation bloc shrank in April.
In Germany, the eurozone’s biggest economy, manufacturing contracted for the second month running.
Official data released on Tuesday showed record high unemployment in the eurozone, and inflation at a three-year low.
Ahead of the ECB’s announcement, many economists were forecasting that lower interest rates were likely, but said the fresh data released this week made the case for a cut even stronger.
ECB president Mario Draghi told a news conference that “weak economic sentiment has extended into the spring of this year.”
“Inflation expectations in the euro area continue to be firmly anchored.”
ECB has decided to cut its benchmark interest rate to a new record low amid ongoing worries about the eurozone’s economy
“The cut in interest rates should contribute to support a recovery later in the year,” he added.
There are concerns that the ECB’s low interest rates are not feeding through to those economies most in need of a boost, with potential lenders still worried about the economic health of countries such as Greece and Spain.
“Monetary policy stance will remain ‘accommodative’ for as long as needed,” Mario Draghi said.
“We will monitor very closely all incoming information, and assess any impact on the outlook for price stability.”
Mario Draghi said that the ECB was prepared to cut interest rates further should conditions make it necessary. He also said the central bank was “technically ready” for negative deposit rates.
The euro fell sharply on the comments, losing 0.6% against the pound to 84.135p, edging it towards the recent low of 83.98p that it reached on April 26. Against the dollar, the euro fell below $1.31.
In recent months there have been growing calls for European countries to move away from austerity measures, which critics say are stifling growth. Instead there are calls for a greater focus on stimulus measures.
Both French President Francois Hollande and newly-elected Italian Prime Minister Enrico Letta have urged a reconsideration of austerity policies.
On Thursday, European Council President Herman Van Rompuy said governments must take immediate action to promote growth and the creation of jobs because patience with austerity measures is wearing thin in some countries.
“Taking these measures is more urgent than anything,” he told a conference in Portugal.
“After three years of firefights, patience with austerity is wearing understandably thin.”
A cut in interest rates lowers the costs for troubled banks that have taken emergency loans from the ECB, and could help them repair their finances so they can improve lending. But analysts were divided over whether the cut would have much of an impact.
Purchasing Managers’ Index (PMI) on Thursday highlighted the problems facing many eurozone countries. The index for Germany’s manufacturing sector, which accounts for around a fifth of the economy, fell to 48.1 in April from 49 in March. A reading below 50 indicates contraction.
And in France, Italy and Spain, the eurozone’s next three biggest economies, the PMI data also revealed contractions in manufacturing activity.
For the 17-nation eurozone bloc as a whole, the PMI index fell to 46.7 last month, from March’s 46.8.
“There is nothing here to suggest that manufacturing will turn the corner and stabilize any time soon, putting greater onus on policymakers to act quickly to reinvigorate growth,” said Chris Williamson, chief economist at Markit, which collates the PMI figures.
ECB President Mario Draghi has said the initial plan to make small savers pay for the Cyprus bailout was “not smart”.
Mario Draghi said a proposal to make “insured depositors” pay did not come from the European Central Bank, the European Commission or the IMF.
He said the proposal only arose in talks with the Cypriot authorities, and was “swiftly corrected”.
Mario Draghi was speaking after the ECB held eurozone interest rates at 0.75% again.
It was the ninth month in a row that the interest rates had been kept unchanged, but Mario Draghi indicated that the ECB was ready to act, if necessary.
He also suggested that the problems seen for some time in smaller, weaker economies such as Spain, were spreading to stronger economies.
Cyprus eventually agreed a 10 billion-euro ($12.8 billion) international bailout, which will see depositors with more than 100,000 euros lose some of their savings.
Accounts which have less than 100,000 euros in them will not be affected, but would have been under the original bailout proposals.
ECB President Mario Draghi has said the initial plan to make small savers pay for the Cyprus bailout was not smart
Speaking about the bailout, Mario Draghi said that the initial plan to impose a levy on all depositors “was not smart to say the least”.
He said the ECB did not envisage savers covered by a guarantee – that is, those with up to 100,000 euros in savings – being forced to contribute towards the country’s rescue plan.
“You have a pecking order, and here the insured depositors should be the very last category to be touched,” he said.
“The [European] Commission draft directive foresees exactly this.”
Mario Draghi also told a news conference that the Cyprus bailout was not a blueprint for what would happen in further bailouts.
“Cyprus is no template,” he said.
Mario Draghi was asked whether it would have been better for Cyprus to leave the euro.
“What was wrong with Cyprus’s economy doesn’t stop being wrong if they are outside the euro,” he said.
“So, the fiscal budget stabilization, consolidation, the restructuring of the banking system would be needed anyway, whether you are in or out. To be out doesn’t preserve the country from the need for action.”
Leaving the euro would entail a big risk for Cyprus, and that an exit from the currency could find the country having to pursue reforms “in a much more difficult environment”, he added.
Mario Draghi also said that the recent crisis in Cyprus had “reinforced the Governing Council’s determination to support the euro”.
Despite continuing signs of economic weakness across the eurozone, the ECB president said rates were on hold “for the time being” by consensus.
He said he expected to see a gradual economic recovery in the second part of 2013.
However, Mario draghi said that growth was “subject to downside risks”. Risks included slow implementation of structural reforms by governments, or weak domestic demand.
“These factors have the potential to dampen the improvement in confidence and thereby delay the recovery,” he added.
After his comments the euro fell to its lowest level in more than four months against the dollar, to $1.2745 – the weakest since mid-November – before recovering its losses.
However, Mario Draghi said that inflation would be contained in the medium term, but the bank would act if necessary.
“Our monetary policy stance will remain accommodative for as long as needed,” he said.
“In the coming weeks, we will monitor very closely all the incoming information on economic and monetary developments, and assess the impact on the outlook for price stability.”
Mario Draghi also reiterated that the ECB could not step into the gap left by a lack of action by eurozone governments to solve the region’s debt crisis,
“We cannot replace lack of capital in the banking system or the lack of actions by governments. The most stimulative measures is to pay the arrears.”
The latest indication of the state of the eurozone economy came on Thursday from financial information service Markit, which said the region’s economic contraction had worsened last month.
Its closely-watched composite purchasing managers’ index (PMI), which tracks both the services and manufacturing sectors, also suggested that the German economy slowed to “near stagnation” last month, while France’s recorded its biggest contraction for four years.
The European Central Bank (ECB) has revised down its eurozone growth forecasts for 2012 and 2013 as “economic weakness extends into 2013”.
ECB President Mario Draghi said the bank expected the bloc’s economy to shrink by about 0.5% this year, before recovering later in 2013.
He said weak consumer and investor sentiment was weighing on growth.
Earlier, the ECB held the benchmark eurozone interest rate at the record low of 0.75%, as had been expected.
Mario Draghi said rates had been left unchanged due to higher energy prices, rising taxes and the fact inflation fell from 2.5% to 2.2% last month.
Interest rates are the main tool used by central banks to influence demand and therefore prices in the economy.
Mario Draghi said the bank expected inflation to fall below 2% next year. The target rate is below but close to 2%.
Interest rates have been at 0.75% for five months, after July’s cut from 1%.
ECB has revised down its eurozone growth forecasts for 2012 and 2013
The ECB revised down is forecast for the eurozone economic growth in 2013 to between minus 0.9% and plus 0.4%.
For 2014, it forecast growth of between 0.2% and 2.2%.
Mario Draghi said “persistent uncertainty” was weighing on economic activity.
He said the bank continued to see “downside risks”, in particular “uncertainties about the resolution of sovereign debt issues in the euro area, geopolitical issues and fiscal policy decisions in the United States”.
He was referring to the so-called fiscal cliff of automatic spending cuts and tax rises which kick in the new year and which will push the US economy back into recession. US policymakers are trying to agree a way to avoid the cliff.
However, Mario Draghi said a “strengthening global demand and a significant improvement in financial market confidence” would help fuel a recovery later in 2013.
The eurozone is back in recession as austerity measures designed to reduce debt levels continue to undermine demand and confidence.
The economy of the 17-member bloc contracted by 0.1% between July and September, after shrinking 0.2% in the previous three months.
Meanwhile, the unemployment rate is at a record high of 11.7%.
The eurozone was last in recession in 2009, when the economy contracted for five consecutive quarters.
Eurozone unemployment rate hit a new record high in October, while consumer price rises slowed sharply.
The jobless rate in the recessionary euro area rose to 11.7%. Inflation fell from 2.5% to 2.2% in November.
The data came as European Central Bank President Mario Draghi warned the euro would not emerge from its crisis until the second half of next year.
Government spending cuts would continue to hurt growth in the short-term, Mario Draghi said.
The unemployment rate continued its steady rise, reaching 11.7% in October, up from 11.6% the month before and 10.4% a year ago.
A further 173,000 were out of work across the single currency area, bringing the total to 18.7 million.
The respective fortunes of northern and southern Europe diverged further. In Spain, the jobless rate rose to 26.2% from 25.8% the previous month, and in Italy it rose to 11.1% from 10.8%.
In contrast, unemployment in Germany held steady at 5.4% of the labor force, while in Austria it fell from 4.4% to just 4.3%.
Data earlier this month showed that the eurozone had returned to a shallow recession in the three months to September, shrinking 0.1% during the quarter, following a 0.2% contraction the previous quarter.
The less competitive southern European economies, such as Spain and Italy – where governments have had to push through hefty spending cuts to get their borrowing under control, and crisis-struck banks have been cutting back their lending – have been in recession for over a year.
But the economies of Germany and France have also begun to weaken. Growth in the eurozone’s two biggest economies came in at a disappointing 0.2%.
And more recent data suggests that both core eurozone economies have continued to skirt recession during the autumn.
Retail sales in Germany shrank 2.8% in October versus the previous month, down 0.8% from a year earlier, according to data released on Friday. Analysts had expected the country to record unchanged or moderately growing sales.
Meanwhile, separate data showed consumer spending in France shrank 0.2% in October versus the previous month, with spending on cars and other durable goods hardest hit.
The sharp slowdown in the eurozone’s consumer price index, to 2.2% in November, is also symptomatic of the weakness of spending.
However, the inflation data may also open the door to further measures by the ECB to boost the economy, as the index fell much closer to the central bank’s 2% target rate.
“We have not yet emerged from the crisis,” said Mario Draghi, speaking on pan-European radio.
“The recovery of the eurozone will certainly begin in the second half of 2013.
“It’s true that the budgetary consolidation entails a short-term contraction of economic activity, but this budgetary consolidation is inevitable.”
Despite Mario Draghi’s warning, and the generally poor state of the eurozone economy, markets have begun to take a far more sanguine view of the single currency’s future.
Italy’s implicit cost of borrowing in the financial markets has fallen to its lowest level in two years, dropping to an implied interest rate of about 4.5% for 10-year debt.
Spain is able to borrow from markets at a 10-year rate of about 5.5% – far below the 7%-8% rate being demanded over the summer.
Mario Draghi conceded that the announcement of the ECB’s willingness to buy up potentially unlimited amounts of government debt had boosted market confidence, even though no eurozone government had actually taken up the ECB’s offer yet.
However, borrowing costs in southern Europe still remain elevated compared with France and especially Germany. Berlin is currently able to borrow for 10 years at 1.37%, close to an all-time low.
“For now, what the ECB has done is to stop the bleeding,” said Stephen Gallo at RBS.
“The central bank needs to close the gap in loan borrowing costs between the periphery and the core.”
However, Stephen Gallo said in his view the only way to do this was for the eurozone to move ahead with its “banking union” – which includes putting all eurozone banks under a common regulator, and creating a pan-eurozone scheme for guaranteeing bank accounts.
He was echoing the view of Christine Lagarde, head of the International Monetary Fund, who on Friday said that creating a single deposit guarantee system should be Europe’s top priority, more important than getting government budgets under control.
Fears over a possible government default or exit from the eurozone have made it much harder for Spanish and Italian banks to borrow, and put them at risk of a sudden exodus of depositors. This in turn has undermined the banks’ role in supporting their respective national economies.
Eurozone finance ministers and the IMF have agreed on a deal on emergency bailout for debt-laden Greece.
They have agreed to cut debts by 40 billion euros ($51 billion) and have paved the way for releasing the next tranche of bailout loans – some 44 billion euros.
Greek Prime Minister Antonis Samaras welcomed the deal, saying “a new day begins for all Greeks”, but it was condemned by the main opposition party.
European and Asian shares and the euro all climbed on news of the agreement.
The German Dax and French Cac 40 indexes each rose by 0.8% at the start of trading on Tuesday, while in London the FTSE 100 gained 0.6%, reversing losses from Monday.
In Asia, the MSCI’s broadest index of Asia Pacific shares outside Japan gained 0.3% to its highest level in more than two weeks. Australian shares rose 0.7%, while South Korea’s benchmark Kospi index was up nearly 0.9%.
The euro reached its highest level against the dollar since 31 October, up about 0.2% to $1.30.
The breakthrough came after more than 10 hours of talks in Brussels. It was the eurozone’s third meeting in two weeks on Greece.
The deal opens the way for support for Greece’s teetering banks and will allow the government to pay wages and pensions in December.
The leader of the eurozone finance ministers’ group, Jean-Claude Juncker, said Greece would get the next installment of cash on 13 December.
Greece has been waiting since June for the tranche, to help its heavily indebted economy stay afloat.
European Central Bank (ECB) president Mario Draghi said the bailout would “strengthen confidence in Europe and in Greece”.
For his part, Jean-Claude Juncker said the deal did not just have financial implications.
“This is not just about money. It is the promise of a better future for the Greek people and for the Euro area as a whole.”
Greece’s international lenders have agreed to take steps to reduce the country’s debts, from an estimated 144%, to 124% of its gross domestic product by 2020.
These include cutting the interest rate on loans to Greece, and returning 11 billion euros to Athens in profits from ECB purchases of Greek government bonds.
Ministers have also agreed to help Greece buy back its own bonds from private investors.
So far the ECB, IMF and the European Commission have pledged a total of 240 billion euros in rescue loans, of which Greece has received around 150 billion euros.
In return, Greece has had to impose several rounds of austerity measures and submit its economy to scrutiny.
The European Union’s commissioner for economic and monetary affairs, Olli Rehn, said it was crucial that a deal had finally been reached.
“For the eurozone this was a real test of our credibility, of our ability to take decisions on the most challenging of issues.
“And it was a test that we simply could not afford to fail.”
However, the Greek radical left opposition party Syriza – who came close to winning elections earlier this year – rejected the deal.
“It’s a half-baked compromise, a band-aid on the gaping wound of Greece’s debt,” said Syriza deputy Dimitris Papadimoulis, who claimed that the German Chancellor Angela Merkel had blocked attempts to cut Greece’s debt in half.
“This is a good deal, but I think a good deal was long overdue for Greece,” said Gerard Lyons, chief economist of Standard Chartered Bank.
“The most significant thing is the fact that about 20% of Greek debt has been written off,” he said. “The lesson of all crises elsewhere is that unless you start to write down debt you don’t really start to make inroads.”
However, Gerard Lyons cautioned that while the deal mitigated the risk of Greece leaving the euro, it did little to help the Greek economy recover.
“What Greece really needs is to reverse [its] austerity measures,” he added. Spending cuts by Athens – a pre-condition for its bailout – have been blamed for significantly worsening a multi-year contraction of the Greek economy.
The sentiment was echoed by Konstantinos Michalos, president of Athens Chamber of Commerce and Industry.
“[The deal] has to be seen as a major vote of confidence to the country,” said Konstantinos Michalos while affirming that “it’s simply extending the lifeline”.
Both agreed that Germany’s coming parliamentary elections played a role in making the deal possible.
“Six months ago the feeling in Europe generally was that they could sacrifice Greece,” said Gerard Lyons.
“That thinking has now changed, particularly in Germany.”
A new sense of caution has descended on Berlin ahead of the elections.
But while that has increased Germany’s willingness to head off the broader eurozone crisis that might be sparked by a Greek exit from the single currency, according to Konstantinos Michalos it has also made the German government less willing to grant Greece the greater leniency needed to ensure a stronger economic recovery.
Konstantinos Michalos said the onus was now on his own government to push through structural reforms – such as reducing protections for existing workers – in order to boost competitiveness and confidence in the economy, and achieve positive growth.
“We need to progress with these structural reforms immediately,” he said.
“It is not a question of years or months. It is a matter of weeks.”
The Greek economy is projected by Eurostat to have shrunk by a fifth by the end of this year since the crisis began in 2008.
Asian stock markets have risen, joining a global rally, after European Central Bank’s president, Mario Draghi, unveiled a plan targeted at easing the region’s debt crisis.
The ECB said it would buy bonds of the bloc’s debt-ridden nations in a bid to bring down their borrowing costs.
The implied borrowing costs for Spain and Italy fell after the announcement.
Japan’s Nikkei 225 index rose 2.2%, Korea’s Kospi gained 2.6% and Hong Kong’s Hang Seng added 2.4%.
Asian stock markets have risen after ECB unveiled a plan targeted at easing the region's debt crisis
“We think this is a credible plan to addressing the issue, and while there are still political hurdles, we expect those will be addressed,” said Alec Young, global equity strategist at S&P Equity Research.
The borrowing costs for some of the eurozone’s larger economies, such as Spain and Italy, had risen to levels considered unsustainable earlier this year.
That led to concerns that these nations would no longer be able to borrow money from international investors and, therefore, would not be able to repay their debts, further escalating the region’s debt crisis.
Many investors feared such developments would not only hurt the eurozone’s growth, but could also derail the global economic recovery.
That would have had a knock-on effect on Asia’s export-dependent economies, which rely heavily on global demand.
However, the ECB’s announcement, and the drop in borrowing costs of Spain and Italy thereafter, has helped allay those fears.
Markets in the US rose, with the Dow Jones index hitting it highest level in almost five years.
In Europe, Germany’s Dax index closed 2.9% higher, while France’s Cac 40 jumped 3% and the UK’s FTSE 100 rose 2.1%.
“The markets were looking for a strong decisive action and a commitment from the central bank that they are ready to act if any issues blow up in the region’s bigger economies,” said Justin Harper of IG Markets.
“Last night they got that.”
The ECB announcement also provided a boost to the euro currency, which rose against the US dollar and the Japanese yen.
The euro was trading at $1.263 in Asian trading. It also rallied against the Japanese currency to 99.63 yen.
Analysts said that the ECB’s plan had boosted investor morale and that they were more confident of investing in riskier assets.
“The ECB’s actions afford time, allowing risk appetite to stage a comeback, for now,” said Vincent Chaigneau, a strategist at Societe Generale.
However, they warned that while the ECB’s plan had helped allay market fears, the crisis was far from over.
“Mr. Draghi has won a battle, but cannot win the euro area crisis war by himself,” Vincent Chaigneau said.
“The hardest task of all – getting governments to drop posturing in return for leadership and deep reforms – still awaits us.”
European Central Bank’s president, Mario Draghi, has unveiled details of a new bond-buying plan aimed at easing the eurozone’s debt crisis.
Mario Draghi said the scheme would provide a “fully effective backstop” and that the euro was “irreversible”.
The ECB aims to cut the borrowing costs of debt-burdened eurozone members by buying their bonds.
Ahead of the announcement, the central bank kept the benchmark eurozone interest rate unchanged at 0.75%.
Mario Draghi said the ECB would engage in outright monetary transactions (OMTs) to address “severe distortions” in government bond markets based on “unfounded fears”.
He insisted that the ECB was “strictly within our mandate” of maintaining financial stability, but reiterated the need for governments to continue with their deficit reduction plans and labor market reforms.
He added that the ECB’s actions came in response to eurozone economic contraction in 2012, with continued weakness likely to continue into 2013.
The ECB expects the eurozone economy to shrink by 0.4% in 2012 and grow by 0.5% in 2013, with inflation rising to 2.6%.
European Central Bank’s president, Mario Draghi, has unveiled details of a new bond-buying plan aimed at easing the eurozone's debt crisis
OMTs will only be carried out in conjunction with European Financial Stability Facility or European Stability Mechanism programmes, he said.
In other words, countries will still have to request a bailout before the OMTs are triggered.
The maturities of the bonds being purchased would be between one and three years and there would be no limits on the size of bond purchases, he added.
The ECB will ask the International Monetary Fund to help it monitor country compliance with its conditions.
Responding to the plans, Peter Westaway, chief economist for Europe at asset manager Vanguard, said: “This is just the good news that was priced by the markets, and it has now been confirmed.
“There is a long-term question of whether this will be enough to meet the long-term financing needs of Italy, and that probably remains.”
European stock markets reacted positively to the announcement, with the FTSE 100 surging 2.1%; the German Dax, 2.91%; the French Cac 40 index, 3.06%; and the Spanish IBEX, 4.91% at the close.
Bank shares in particular rose sharply on the news, with French banks Credit Agricole and Societe Generale up 8.44% and 7.76% respectively, while in Germany, Deutsche Bank rose 7.06% and Commerzbank, 5.25%. In London, Lloyds Banking Group rose 6.69%.
However, the euro fell back against the dollar to $1.2571 following its high of $1.265 reached before the ECB announcement.
While Mario Draghi was announcing the ECB’s plans, German Chancellor Angela Merkel was meeting Spanish Prime Minister Mariano Rajoy for talks on the eurozone crisis.
In a joint news conference afterwards, Angela Merkel said: “We have to restore confidence in the euro as a whole, so that the international markets have confidence that member countries will fulfil their commitments.”
Mariano Rajoy said: “We want to dispel any doubts on the markets about the continuity of the euro.”
Jens Weidmann, president of Germany’s Bundesbank, remains vigorously opposed to the ECB’s plan, concerned that member states could become hooked on central bank aid and failed to reform their economies sufficiently.
But the majority of the 23 ECB council members support the plan.
And the Organization for Economic Co-operation and Development (OECD) added its support for the ECB bond-buying plan on Thursday, as it warned that the eurozone crisis posed the greatest risk to the global economy.
It is calling for more action from central banks to prevent a break-up of the eurozone.
“Concerns about the possibility of exit from the euro area are pushing up [government bond] yields, which in turn reinforces break-up fears,” the OECD said in its global economic outlook.
“It is crucial to stem these exit fears. This could be achieved by the ECB undertaking bond market intervention to keep spreads within ranges justified by fundamentals.”
Mario Draghi is hoping that ECB intervention in the bond markets will help reduce the borrowing costs of debt-laden countries such as Spain and Italy and lessen the likelihood of them needing to ask for a full sovereign bailout, an eventuality that could bankrupt the eurozone and cause the collapse of the euro.
Spain, which has already asked for 100 billion euros in state aid to help its debt-stricken banks, is currently paying yields of 6.42% on its 10-year bonds, while Italy’s 10-year bond yields are 5.51%, below the critical 7% figure thought likely to trigger a sovereign bailout request.
Outright Monetary Transactions (OMTs)
The term used for the European Central Bank’s programme of buying government bonds with maturities of between one and three years with the aim of reducing a specific country’s borrowing costs. OMTs are only triggered if a country has applied to the European Financial Stability Facility or European Stability Mechanism for financial assistance and are conditional on a government putting in place financial reforms approved by eurozone financial authorities and monitored by the International Monetary Fund.
German government has criticized leading conservative politician Alexander Dobrindt for suggesting that Greece will have to leave the eurozone.
Foreign Minister Guido Westerwelle said “bullying” of Greece must stop.
And in a TV interview Chancellor Angela Merkel said: “Everyone should weigh their words very carefully.”
Earlier, Christian Social Union leader Alexander Dobrindt, an ally of Angela Merkel, said he expected Greece to leave the eurozone in 2013.
He said he saw “no way round” a Greek exit. He also called the European Central Bank (ECB) chief Mario Draghi “Europe’s currency forger”.
His party, a junior coalition partner of Angela Merkel’s Christian Democrats (CDU), is preparing for an election in Bavaria and Germany’s general elections next year.
German government has criticized leading conservative politician Alexander Dobrindt for suggesting that Greece will have to leave the eurozone
Last week Angela Merkel reiterated that she wanted Greece to stay in the eurozone. And on Sunday she told German ARD television that “we are in a very decisive phase in combating the euro debt crisis”.
Greece is under pressure to speed up far-reaching reforms, including privatization and civil service job cuts, in order to continue receiving installments of its 130 billion-euro ($163 billion) international bailout.
It is the second massive bailout agreed for Greece since the 2008 debt crisis shook the global economy and German politicians have made it clear they will not stomach a third.
Guido Westerwelle warned that remarks like Alexander Dobrindt’s could harm Germany’s reputation as the eurozone tackles the debt crisis.
Comments by the head of Germany’s Bundesbank, Jens Weidmann, also signaled divisions at the top over the ECB’s handling of the crisis.
In early August Mario Draghi announced plans for the ECB to buy the bonds of countries like Italy and Spain, whose borrowing costs have reached levels widely regarded as unsustainable.
He is expected to give details after a 6 September meeting of the ECB’s governing council.
But Jens Weidmann, one of 17 eurozone central bank chiefs involved in ECB policy, said the plans risked making central bank financing “addictive like a drug” for struggling eurozone governments.
He warned that it was “close to state financing via the printing press” and could be a violation of EU rules preventing government-to-government subsidies.
Traditionally the ECB has been reluctant to undertake large-scale bond-buying because it is seen as inflationary, and the ECB’s priority is to keep inflation under control.
But during the eurozone crisis the ECB has been buying up sovereign debt to help ease the market pressure on struggling, debt-laden eurozone countries.
At the weekend the German and French governments indicated that Greece’s plea for a two-year “breathing space” in meeting its bailout obligations was unacceptable.
Eurozone leaders are waiting for a crucial report on Greece’s finances, due in late September. It will be delivered by the troika supervising Greece’s fulfillment of the bailout conditions – the ECB, International Monetary Fund (IMF) and European Commission.
Greece’s continued access to the bailout lifeline depends on a favorable report from the troika.
Athens is trying to finalize a package of 11.5 billion euros of spending cuts over the next two years.
European markets have fallen after the European Central Bank (ECB) president Mario Draghi said the bank would come up with ways to help struggling eurozone countries “over the coming weeks”.
Analysts had been hoping for more details and immediate action.
Help from the ECB would also only be given if the governments themselves made certain commitments, he said.
The Spanish and Italian stock markets fell sharply while both countries’ borrowing costs rose sharply.
Earlier, the ECB kept the main eurozone interest rate at a record low of 0.75%.
There had been hopes that Mario Draghi could announce immediate measures to bring down the cost of borrowing for some of the eurozone’s struggling members.
“What we have expressed is guidance, and strong guidance, about strong measures which will be completed in the coming weeks,” Mario Draghi said.
High borrowing costs have been at the centre of the eurozone crisis, with countries needing bailouts when the yields on their 10-year bonds have been consistently above 7%.
Bond yields are taken as indicators of what interest rate governments would have to pay to borrow money.
European markets have fallen after the ECB president Mario Draghi said the bank would come up with ways to help struggling eurozone countries "over the coming weeks"
Mario Draghi said that the high yields on some eurozone government bonds were unacceptable, adding that, “the euro is irreversible”.
He said the ECB may intervene in the bond markets to support struggling nations.
But having fallen in recent days due to the anticipation of ECB support, Spain’s 10-year bonds rose above 7% after Mario Draghi spoke, having been at 6.6% before he started.
“Once again, we have no commitment to action from the ECB, and no execution of promises previously made,” said Carl Weinberg, chief economist at High Frequency Economics.
“Traders and investors who expected immediate action are, and should be, disappointed. More scolding of governments, but no ECB action, is the bottom line.”
The yield on Italian 10-year bonds rose from 5.7% before Mario Draghi spoke to 6.2% afterwards.
But yields on short-term bonds fell, reflecting Mario Draghi’s plans to buy them instead of longer term debt.
Some analysts were more positive about Mario Draghi’s comments.
“This is a revolutionary policy, as far as the ECB is concerned. It means the ECB plans to go into the markets and buy bonds, of two to three-year durations, in very substantial quantities,” said Nick Parsons at National Australia Bank.
“These are potentially unlimited and should be big enough to have the desired effect. Mr. Draghi is certainly on the right track.”
At his press conference, Mario Draghi said that the ECB’s bond-buying process would resume, but that it would be different to the Securities Markets Programme (SMP), which involved buying large quantities of government bonds from banks and other financial institutions on the open market.
Mario Draghi said that the new scheme would involve buying shorter-term bonds, which should allay some of the fears of the German government, worried about having to guarantee debts of weaker countries for years.
Governments, however, would also first have to apply for help from one of the eurozone’s rescue funds, the European Financial Stability Facility or the European Stability Mechanism, he said.
They would also have to demonstrate they were making necessary changes.
“Policymakers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination,” he said.
Currently, the European bailout fund – the EFSF – and its delayed sister fund – the ESM – would require any country seeking help to sign a memorandum of understanding, or promise to carry out certain measures such as cutting spending or raising taxes.
When asked whether Spain, and Italy would, therefore, have to submit to similar strictures imposed on Portugal, Ireland and Greece before the ECB could act to buy their bonds, Mario Draghi replied: “Yes, that is exactly how you should see it.”
There were also signs of continued division on the ECB governing council.
Asked whether the ECB’s decisions had been unanimous, he replied: “The endorsement to do whatever it takes to preserve the euro as a stable currency has been unanimous.”
“But it is clear, and it is known, that Mr. Weidmann [ECB member and head of the German bank] and the Bundesbank have their reservations… about buying bonds.”
The ECB, which sets the cost of borrowing for the 17 countries which use the euro, cut its key rate from 1% to 0.75% last month, to try to bring down borrowing costs and stimulate economic activity.
The European Central Bank (ECB) has announced it reduces its key interest rate from 1% to 0.75%, a record low for the eurozone.
The move comes as the eurozone economy continues to be weak.
The ECB also cut its deposit rate, from 0.25% to zero.
A cut in the ECB’s deposit rate is designed to stimulate lending between banks, as funds placed with commercial banks overnight are currently receiving 0.3% in interest.
Surveys released earlier this week indicated that the eurozone’s service sector had continued to shrink in June and that business confidence had fallen.
The ECB’s president, Mario Draghi said the eurozone was likely to show little or no growth in the second quarter of the year, but should recover somewhat by the end of the year.
The European Central Bank reduces its key interest rate from 1 percent to 0.75 percent, a record low for the eurozone
Mario Draghi, said the eurozone economy faced risks, but that inflation did not appear to be a threat: “Inflation rate pressure…has been dampened. At the same time, economic growth in the euro area continues to remain weak, with heightened uncertainty weighing on confidence and sentiment.”
At a media conference following the announcement of the decision he was asked it the situation was as bad as in 2008, to which he replied: “Definitiely not. We are not there at all.”
The rate cuts come despite an inflation rate running above the 2% target for the single-currency zone.
But the rate has been sliding recently and is expected to fall to an average of 1.6% next year.
An interest rate below inflation is meant to discourage saving and promote investment, as the interest rate does not keep pace with inflation, meaning the value of the money on deposit is eroded.
The interest rate cut is the third since Mario Draghi became ECB president late last year.
Mario Draghi said the decision on rates was unanimous.
Spanish Economy Minister Luis de Guindos has dismissed talk of it seeking a bailout from the International Monetary Fund (IMF) as “senseless”.
And the IMF denied that Spain had asked to discuss rescue loans.
The IMF has contributed to bailouts of all the other eurozone nations, such as Greece, that needed help.
Meanwhile, the European Central Bank (ECB) president Mario Draghi described the current set-up of the eurozone as “unsustainable”.
There were rumors that Spain had already gone to the IMF, after the Spanish deputy prime minister went to meet the IMF’s managing director Christine Lagarde.
Spanish Economy Minister Luis de Guindos has dismissed talk of it seeking a bailout from the IMF as senseless
“My desire is to not come out and deny these rumours because they are senseless,” Spanish Economy Minister Luis de Guindos said on Spanish television.
Spain has taken Greece’s place as the epicentre of the eurozone crisis as concerns over the health of Spanish banks have shaken markets.
Bankia, Spain’s fourth largest bank, has asked for another 19 billion Euros recently from Madrid, but many question whether Spain will be able to afford it.
Speaking to the European Parliament, Mario Draghi said: “Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no. Can the ECB fill the vacuum of the lack of action by national governments on the structural problem. The answer is no.
“The next step… is to clarify what is the vision a certain number of years from now. The sooner this is specified, the better it is.”
And EU economics commissioner Olli Rehn said more austerity was needed if the eurozone was to avoid disintegration.
Olli Rehn talked down the idea of European states issuing joint bonds, saying that austerity and closer co-operation were needed.
“We need a genuine stability culture and a much upgraded common capacity to contain common contagion,” he told a conference.
New figures also showed eurozone inflation slowed more than expected this month.
Inflation in the 17 countries that use the euro eased to 2.4% in May from 2.6% in April.
The figure is still above the ECB’s target to keep inflation below 2%, but the lower-than-expected number could fuel calls for an interest rate cut next week.
In other figures released on Thursday, Germany’s unemployment rate fell below 7% as Europe’s biggest economy continued to perform strongly.
The jobless rate dropped to 6.7% in May, from 7% in April, as the number of people unemployed fell by 108,000 to 2.86 million.
However, there was more bad news from Greece as figures showed that Greek retail sales volumes fell by 16.2% in March compared with a year earlier. This followed February’s decline of 12.9%.
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