By Simon Morgan, AFP
FRANKFURT–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 (ECB) 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 program of indirectly buying up the bonds of debt-mired countries. On top of this, the ECB also pumped more than 1 trillion euros (US$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.