Resisting calls for a rate cut, the European Central Bank on Wednesday maintained its key interest rates, which are already at record low levels.
The ECB seems to have passed the onus of solving the fiscal problems and recapitalizing the banking systems to the respective euro zone governments.
Pressure was mounting on the ECB to cut rates and introduce new liquidity injection measures to alleviate the crisis now engulfing Spain. Fears that a Greek exit that might have far reaching consequences are also plaguing the region.
The Governing Council led by President Mario Draghi maintained the main refi rate at 1 percent despite mounting evidence that the euro zone is in recession.
"Economic growth in the euro area remains weak with heightened uncertainty weighing on confidence and sentiment giving rise to increased downside risk to the economic outlook," he said at a press conference following the interest rate announcement.
However, Draghi assured there is no "post-Lehman-like event" on the horizon, referring to the near-collapse of the U.S. banking system that sparked a global crisis in 2008.
In light of the region's sluggish economy, some observers thought Draghi would cut the key rate or at least signal rate cuts are imminent. Instead, Draghi said the ECB will extend its offerings of unlimited cash until for the rest of the year.
"We have decided to continue our main refinancing at fixed rate, full allotment for as long as necessary" and at least until January 2013, Draghi said.
The central bank had reduced the rate in November and December, reversing the two hikes undertaken earlier last year. International Monetary Fund Chief Christine Lagarde said yesterday that the ECB has scope to cut rates.
Recently, Draghi said the central bank cannot fix the turmoil in the currency bloc and urged Eurozone leaders to come up with a 'vision' for years ahead.
The ECB policymakers are widely requested to take bolder and decisive action to help stabilize the situation. Elsewhere, Standard & Poor's called for steps that will limit rising borrowing costs in the region.
The next few weeks will be critical for Eurozone as Greece is heading for another election on June 17. According to S&P, there is at least one-in-three chance of Greece exiting the Eurozone in the coming months.
There is a real risk of Greece rejecting bailout conditions after election, and in turn losing access to external funds.
In a radio interview, Spain's Budget Minister Cristobal Montoro said Spain has lost capital markets access due to steep risk premiums also hinting a need for European assistance for its banks. The nation is reeling under recession and a worsening banking sector crisis.
ECB chief supports the recommendation of European Commission to directly utilize the Eurozone's permanent bailout, or European Stability Mechanism, to recapitalize the troubled banks.
The IMF has already denied that it is planning financial assistance for Spain. The G7 finance ministers and central bank governors meeting that was convened to discuss Eurozone crisis concluded on Tuesday without taking any joint action.
The leaders agreed to monitor developments closely ahead of the G-20 summit in Los Cabos during June 18-19.
At 8.30 am ET, Draghi is set to hold a regular post-decision press conference in Frankfurt. The ECB is unlikely to restart its bond-buying programme as they will possibly wait for the results of the EU summit to be held at the end of June.
The ECB is set to release its staff macroeconomic projections, which is likely to indicate an economic situation that is worse that the March forecast. The 17-nation currency bloc failed to grow in the first quarter, but the region escaped a recession.
Suggesting that investors are moving towards 'safe havens', Germany's borrowing costs for five year notes fell to a record low at an auction on Wednesday.
On Tuesday, Moody's Investors Service downgraded six German banks, and three largest banks in Austria.
by RTT Staff Writer
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