Tags: EU | Europe | Interest | Rates

Trichet Warns of Uneven Recovery as Europe Hold Rates Steady

Thursday, 08 Apr 2010 09:09 AM

 

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The European Central Bank left its benchmark interest rate at a record low of 1 percent for the 11th month running Thursday as the 16 countries that use the currency struggle to emerge from recession.

In his press conference, the bank's president Jean-Claude Trichet said the recovery continued in the early months of 2010 — figures earlier this week showed eurozone output was flat in the last three months of 2009 — but that the bounceback would be "uneven" and come at a "moderate pace."

Regarding inflation, Trichet said price stability was likely over the medium term despite a recent uptick largely due to weather factors, and that inflationary expectations were "firmly anchored."

Aside from the economy, the main point of interest will be on what Trichet says about Greek borrowing — earlier the spread between Greek and German 10-year bond yields widened to 4.4 percentage points earlier, its highest level since the euro was introduced in 1999. The higher the spread, the less confidence markets are showing in Greece's ability to pay.

Particularly worrying is that the spread between the Greek and German 2-year bonds swelled by a staggering 1.2 percentage points Thursday as investors demanded more interest just to hold Greek debt.

Greece has returned to the forefront of investors' concerns this week with a vengeance, barely two weeks after the EU finally agreed to a backstop bailout mechanism for the debt-laden country, that would also involve the International Monetary Fund.

Investors will be looking to hear what Trichet says about changes to the bank's policies on lending to banks.

Last month, Trichet told the European Parliament last month that so-called collateral crisis measures will not be scrapped at the end of this year as originally planned — that means that the Bank will continue to accept lower-rated government bonds as collateral from banks. That helps support demand for Greek bonds.

However, Trichet said there will be changes that will likely benefit highly rated countries like Germany and France.

Ostensibly, the move was widely considered to be a concession to Greece, whose credit rating has been slashed amid concerns it can't get a grip on its mountain of debt. Expectations are that the lower rated countries will have to pay a premium for continued access to credit.

Last month, Trichet told the European Parliament last month that so-called collateral crisis measures will not be scrapped at the end of this year as originally planned — that means that the Bank will continue to accept lower-rated government bonds as collateral from banks.

However, Trichet said there will be changes to the operation of the policy that will likely benefit the most highly rated countries like Germany and France. However, the expectation in the markets is that the lower rated countries will have to pay a premium — or haircut — for continued access to the liquidity pool.

For the short-term though, the move was widely considered to be a concession to Greece, whose credit rating has been slashed amid concerns it can't get a grip on its mountain of debt.

Investors had worried that the ECB would no longer accept Greek debt if the ECB returned to rules that it would accept only highly rated bonds as collateral for short-term credit to banks, or if the country's rating was downgraded again.

"Markets expect further announcements on how much longer supportive monetary policy measures such as the relaxed collateral requirements will remain in place," said Jorg Radeke, economist at the Centre for Economic and Business Research.

Earlier, in London, the Bank of England extended a yearlong record low in interest rates and left its multibillion-pound asset purchasing program on hold in its last monthly decision before a national election.

The decision to keep rates at 0.5 percent for the 13th consecutive month and maintain the so-called quantitative easing program at 200 billion pounds ($304 billion) was widely anticipated amid concerns that Britain's recovery from a punishing recession remains fragile.

"The recovery is taking shape but remains heavily reliant on policy support," said Stephen Boyle, head of RBS Group Economics.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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