Business, Finance & Economics

European Central Bank cuts interest, rules out 'bazooka' solution


A huge symbol of the euro is placed in front of the European Central Bank (ECB) late on June 1, 2008 in Frankfurt.


Dominique Faget

The European Central Bank (ECB) cut interest to 1.0 percent Thursday, its lowest rate since the financial crisis hit in 2009.

The quarter-point cut is the ECB's second since Mario Draghi took over as its president last month.

Draghi also promised to offer banks unlimited credit for three years; to cut reserve requirements for commercial banks; and to accept a broader range of assets as collateral for ECB loans, the Wall Street Journal reported.

Some of these measures go further than those the ECB took in the wake of Lehman Brothers' collapse and the panic that followed in 2008, the WSJ said.

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However, for the analysts expecting a far-reaching plan to tackle the European debt crisis, they did not go far enough.

Specifically, there had been speculation that the ECB would buy up Italian debt if eurozone governments agreed strict limits on borrowing at a European Union leaders' summit in Brussels Thursday and Friday, reported the BBC.

However, Draghi said Thursday it was up to the EU to use its rescue fund to support struggling governments.

He also shot down suggestions that the ECB could lend money to the International Monetary Fund to buy up euro zone bonds, which he said was "not compatible with the treaty," reported Reuters.

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The ECB is effectively ruling itself out of a so-called "bazooka" solution to Europe's troubles, Societe Generale analyst James Nixon told Bloomberg:

"The headline event today was that Draghi made it absolutely and explicitly clear that there would be no ECB bond-buying bazooka. They’ll stay in the market but will only buy small amounts. It’s governments who’ll have to do the heavy lifting."

Speaking at a meeting of European conservative leaders in Marseille Thursday, German Chancellor Angela Merkel warned investors not to expect a "big-bang" solution from this week's summit, which starts Thursday evening in Brussels.

Yet French President Nicolas Sarkozy said that Europe was at risk of "exploding," warning:

"If there is no deal on Friday, there will be no second chance."

Markets fell following Draghi's press conference, the Associated Press reported, with the euro dropping nearly two cents against the dollar while he was speaking. Borrowing costs for Italy and Spain also rose. The Dow Jones was down 109 points to 12,086 as of 11:10 AM Eastern time.

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