The European Central Bank left its benchmark interest rate unchanged at 1 percent Thursday with markets waiting to see what further anti-crisis steps the bank might take to keep the debt crisis in Greece from speading to other countries and dragging down the euro.
The post-decision news conference later by bank President Jean-Claude Trichet could not come at a more critical time, with governments such as Spain and Portugal having seen recent debt downgrades and Moody's Investor Services warning Thursday that the debt crisis could hit banking systems in several other countries.
Axel Weber, a member of the ECB's governing council and head of Germany's Bundesbank, warning Wednesday that Greek troubles posed "a serious threat of contagion effects."
The rate decision was widely expected, and investor focus instead was on the debt crisis that has been undermining Europe's 11-year-old shared currency.
One idea being openly discussed is that the ECB may introduce a new anti-crisis measure, such as supporting bond prices — and the balance sheets of banks holding them — by buying government bonds even though the bank's constitution says it can't directly bail out profligate governments. But the ECB could, so the reasoning goes, buy them in the secondary market from banks, avoiding a direct loan to governments.
Jacques Cailloux, chief euro-zone economist at Royal Bank of Scotland, thinks that the ECB would be better "breaking the rule-book than breaking up the euro area" and use this opportunity to take the helm to deliver the best bet to resolving the biggest crisis to afflict the euro since its launch in 1999.
"It should regain its leadership in tackling the crisis following a complete communication and coordination failure among euro area fiscal authorities around the Greek crisis," he said.
The bank has already stepped in by dropping the rating requirement for Greek debt to be used by banks as collateral for ECB credits, meaning the bonds can be used to tap ready cash even if they are downgraded further. That will support Greek bond prices and the banks holding the bonds.
Earlier Thursday, Moody's Investor Service said that the debt crisis enveloping Greece could hurt banking systems in Portugal, Italy, Spain, Ireland and Britain.
Moody's said a key factor would be how market's view the likely success or otherwise of the recently agreed International Monetary Fund and European Union support package for Greece.
That bailout offers the debt-ridden country 110 billion euros ($142 billion) in loans over three years from the IMF and the other 15 countries that use the euro. Greek lawmakers were to vote Thursday on austerity measures required by the rescue, and the bill was widely expected to pass despite violent protests that culminated in three deaths this week.
Moody's report came just a day after the ratings agency put Portugal on watch for a possible downgrade of its sovereign debt and a week after rival Standard & Poor's downgraded Greece's government bonds to junk status.
Investors are skeptical about the ability and inclination of the euro zone, and especially its largest member Germany, to bail out anyone else — last weekend, Greece's 15 partners in the euro zone and the International Monetary Fund agreed Sunday to give the country 110 billion euro ($142 billion) to avoid an imminent, disastrous default.
But that hasn't helped to assuage concerns in the markets that the Greek government can actually deliver the austerity measures it has promised as its part of the deal or that the crisis will spread to other indebted countries like Portugal and Spain — those fears pushed the euro down to $1.2711 on Thursday. It was as high as $1.51 late last year before the Greek crisis worsened.
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