The European Central Bank (ECB) took some steps today to help Europe’s economy and financial system by lowering a key interest rate. The President of the ECB, Mario Draghi, said there is no plan for large-scale government bond purchases, much to the dismay of the markets. The ECB cut the interest rate down to 1%, a quarter point drop.
“The new measures are to ensure enhanced access for the banking sector to liquidity and facilitate the functioning of the euro area money market,” he said.
The ECB will also allow national central banks to accept bank loans as collateral if they meed specific eligibility critera.
“Overall, the ECB tries almost everything it can to prevent a credit crunch in the euro zone,” Carsten Brzeski, an analyst with ING, wrote in a market note.
Other analysts believe the rate cut will have only a small impact. “I thought they’d be more aggressive and cut by 50 basis points because the economy looks like it’s heading for recession and the banking sector is facing big pressures,” said Neil MacKinnon, global macro strategist at VTB Capital.
According to Reuters, a senior euro zone official said euro zone countries will likely agree to lend 150 billion euros to the IMF via bilateral loans from their central banks so the IMF can bail out countries with poor economies.
Draghi is opposed to this as he said it would be against the EU treaty which specifically says member states cannot finance each others’ debt.
“It’s legally complex, but the spirit of the treaty is that one cannot channel money in a way to circumvent the treaty provisions,” Draghi said in a news conference when asked about this proposal.
“If national central banks want to lend to the IMF and then the IMF lends to Indonesia, China, that’s fine. If the IMF were to use this money exclusively to buy bonds in the euro area we think it’s not compatible with the treaty,” he said.
We will see what happens come Friday after the summit ends, but the markets aren’t reacting favorably to news out of Europe so far today with each of the major indices down on the day.