A look at ECB steps to combat Europe's debt crisis

AP News
Posted: Aug 02, 2012 11:12 AM
A look at ECB steps to combat Europe's debt crisis

FRANKFURT, Germany (AP) — Here are some of the key steps the European Central Bank has taken to try to ease Europe's financial crisis and provide a spark to the weak economy.

DECLARATION OF SUPPORT: ECB head Mario Draghi on July 26 said the ECB would do "whatever it takes" to save the euro and added that "believe me, it will be enough." He didn't say what he might do, but the remarks were taken as an indication the bank might intervene in bond markets to lower bond interest yields. Since then, borrowing costs for Spain and Italy have fallen sharply. It's not clear how long that relief will last.

CHEAP LOANS TO BANKS: The ECB made an unlimited amount of cheap, three-year loans available to banks on two occasions since late last year. In December, 523 banks borrowed €489 billion ($608.17 billion) and in February 800 banks borrowed €530 billion. The more than €1 trillion action helped to relieve stress on banks, especially those that were having difficulty borrowing from other banks.

The long duration of the loans gave banks security that they would have the money they needed until 2015. The ECB also started accepting more types of securities as collateral, which made it easier for banks to borrow.

The loans also provided indirect relief to heavily indebted countries that were facing high borrowing costs in bond markets. Some banks took the cheap money and started buying higher-yielding government bonds with it. That raised bond prices and lowered bond interest rates, which equates to lower borrowing costs for struggling countries, such as Spain and Italy.

LOWER INTEREST RATES: The ECB has cut its key interest rate by a quarter percentage point three times since November, the latest move coming July 5. The so-called main refinancing rate is now at a record low of 0.75 percent. This rate is what it charges eurozone banks for loans. It's a benchmark that influences interest rates on the loans banks provide to each other, businesses and consumers.

The ECB also cut the rate it pays banks for depositing their money with the ECB overnight, to zero. That increases the incentive for banks to lend money to each other or to businesses rather than park it with the ECB.

RESERVE CUT: In December, the ECB cut the amount that banks must keep on reserve with it, from 2 percent of their assets to 1 percent. That freed some €100 billion for the banks to use elsewhere.

BOND PURCHASES: Beginning in May 2010, the bank intermittently bought over €210 billion in government bonds of financially weak countries like Spain and Italy on the secondary market — meaning from other investors. The goal was to lower the bond yields, which makes it cheaper for governments to borrow.

The program temporarily held yields down, helping calm the debt crisis for a while. But the program had only limited impact. The ECB was unwilling to buy bonds on a larger scale, a step some said would violate the bank's prohibition on financing governments. The program has been shelved recently and it's not clear when or whether the ECB might use it again.

The ECB is prohibited from buying bonds directly from governments, that is, from loaning them money.