* ECB keeps interest rates at 1.0 pct
* Keeps pressure on governments to solve debt crisis
* Plays down prospect of an imminent third LTRO
* Says ECB can't fill government policy vacuum
By Sakari Suoninen
FRANKFURT, June 6 The European Central Bank on
Wednesday put the onus firmly on euro zone governments to solve
the bloc's debt crisis, dashing expectations it could take
near-term action despite saying the currency area's economy was
under increasing threat.
After the ECB left interest rates at 1 percent, President
Mario Draghi said the bank was not open to trading with
governments on the policy response to the crisis.
Increasingly alarmed by signs Spain's banking crisis is
opening a new front in the debt crisis, some in financial
markets had hoped Draghi would signal a readiness for the ECB to
take fresh action if euro zone governments take bolder action.
Instead, Draghi said it was wrong for the ECB to fill a
policy vacuum created by others and that there would be no quid
pro quo between the central bank and governments.
"There is no sort of horse trading here," he told a news
"Some of these problems in the euro area have nothing to do
with monetary policy ... and I don't think it would be right for
monetary policy to fill other institutions' lack of action."
The respite the ECB bought the euro zone early this year by
injecting over 1 trillion euros into its banking system with
twin 3-year loan operations (LTROs) has faded, with borrowing
costs for troubled countries such as Spain soaring again.
Draghi played down prospects of any imminent third round of
long-term money creation, saying LTROs and the ECB's dormant
bond-buying programme were instruments that are in place but
temporary and "not infinite".
"The issue now is whether these LTROs would actually be
effective," he said when asked about another round.
Draghi said the decision to leave rates unchanged was taken
by "broad consensus". He said a few members, but not many, of
the bank had wanted a rate cut.
The ECB has never before lowered its main refinancing rate
below 1 percent. Berenberg Bank economist Holger Schmieding said
it was an open question whether the ECB would cut rates in July.
"In addition, the ECB offered no hint today that it may
re-activate its two most important non-standard measures, that
is the 3-year long-term refinancing operations (LTROs) and the
purchases of sovereign bonds," Schmieding said.
"This suggests that it would take a major further escalation
of financial tensions for the ECB to go beyond a possible rate
cut in July," he added.
Draghi said markets tensions had not returned to the levels
of late last year, when the ECB offered the 3-year LTROs, and
stressed the euro zone was far from facing a situation like the
one after the collapse of Lehman Brothers in Sept. 2008.
Although flagging the increasing threat to the currency
area's economy, new ECB growth forecasts for 2012 were unchanged
-- in a -0.5 to +0.3 percent range. The prediction for the
following year was barely changed either.
"The economic outlook for the euro area is subject to
increased downside risks relating in particular to a further
increase in the tensions in several euro area financial markets
and their potential spillover to the euro area real economy,"
Markets were unsure how the ECB would react to a recent wave
of weak economic data, knowing that the bank also wants to keep
the pressure on euro zone leaders to tackle the crisis more
The euro was steady at $1.25 after the decision,
Europe's benchmark stock market was up 2 percent after
a recent steep fall.
Jolted into action by Spain's banking crisis, EU leaders
have started considering the form of economic union needed to
make the bloc durable as well as more immediate measures to help
But that end-game is still months or years away and in the
meantime investors view the ECB as the institution with the
firepower to keep the crisis in check.
"For the time being, the ECB is sitting on its hands as the
bloc's economy and financial markets deteriorate further," said
Nicholas Spiro, managing director of Spiro Sovereign Strategy.
"The message from today's ECB meeting is a worrying one: any
mutualisation of euro zone debt is a long way off yet credible
interim measures to shore up confidence will not be forthcoming
for the time being," Spiro added.
In the run up to Wednesday's meeting, International Monetary
Find chief Christine Lagarde said the bank had room to cut rates
. Spain and other hard hit parts of the euro zone
would also like the ECB to revive its bond buying programme to
provide them with cover while they undertake planned repairs to
Euro zone unemployment stood at a record 11 percent in
April, business confidence has slumped and surveys of
manufacturing have hit three-year lows, adding to conviction
that the bloc's economy is set to drop back into recession.
The bank's dilemma is that if does too much, pressure for
government action falls. Yet if it does nothing, troubled
sovereign debtors could find it harder and harder to finance
themselves or maintain confidence in the banks that have bought
much of their debt.
Draghi said the ECB would continue to supply euro zone banks
with all the liquidity they ask for at least until Jan. 15 next
year. It had said in October it would give euro zone bank
unlimited access to central bank funding at least until July 10.
Before the crisis, the ECB allotted a certain amount in its
refinancing operations for which banks had to put in bids. Since
the crisis began, the ECB has extended the maturity of such
operations to as long as 3 years and has lifted funding limits.
Most ECB watchers had expected it would keep its powder dry
until after June 17 Greek elections and a crunch summit of EU
leaders at the end of June, which Draghi and his colleagues hope
will dispel any doubts about Europe's commitment to the euro.
There are also growing signs that a decision on a bailout
for Spain's debt-laden banks will have been taken by the end of