ECB to face Cyprus questions at rate meeting

AP News
Posted: Apr 03, 2013 10:16 AM
ECB to face Cyprus questions at rate meeting

FRANKFURT, Germany (AP) — European Central Bank President Mario Draghi will try Thursday to reassure markets that Cyprus's chaotic bail-out won't worsen the euro currency union's debt crisis — in spite of the heavy losses for the country's savers and strict limits on taking out money from banks or the country.

Last month, Draghi memorably dismissed fears that the euro area would be plunged into turmoil by the political deadlock in Italy as "the angst of the week." Europe's markets and investors have been calmer since the ECB offered to help indebted countries by buying unlimited amounts of bonds. But any new political or financial turmoil raises the question of how long that calm will hold.

At Draghi's news conference Thursday, held after the ECB's monthly rate-setting meeting, attention will focus on the latest "angst" — tiny Cyprus, which this month became the fifth member of the 17 European Union country group that uses the euro to need rescue loans.

Cyprus asked for a bailout after its oversized banking sector suffered huge losses on its investments in Greece and the country's government could not afford to rescue it on its own. In return for a 10 billion euro ($12.84 billion) loan, clinched after a week of turmoil that threatened Cyprus's membership of the euro, the government agreed to impose losses on savers and investors in the country's two biggest banks and overhaul its financial system.

As Cyprus's politicians struggled to reach agreement on the rescue, the ECB threatened to cut off emergency credit to banks unless a deal was cut. The threat helped bring about an agreement, and the ECB said the credits from the Cypriot central bank could continue — for now.

To prevent savers rushing to empty their accounts, Cyprus's were closed for nearly two weeks while the deal was negotiated. When they reopened last week, bank accounts were under strict capital controls — restrictions on how much money people can take out of their accounts and the country.

At Thursday's press conference, Draghi will likely be pressed for his views on these controls. Some economists have warned the measures violate the basic principle of a shared currency: A euro in Cyprus, at least temporarily, is not being treated the same as a euro elsewhere in the 16 other eurozone members. The European Union allows the practice only in exceptional circumstances.

Analysts Richard Barwell and Xinying Chen at Royal Bank of Scotland said Draghi is likely to downplay the issue. The message will be that "capital controls are not the end of the line for Cyprus... Freak out if you wish, but the governing council will keep calm and carry on," they wrote in a note to investors.

The ECB's 23-member governing council is expected to leave its key benchmark interest rate unchanged at a record low 0.75 percent when it meets on Thursday— mainly because the ECB leadership believes it wouldn't do much good. The real problem, they say, is that already-low rates are not being getting through to companies in the form of cheaper loans from banks. Banks in the most indebted countries are unable to pass on low rates due because their own finances are in trouble.

Yet the economy is in bad enough shape to justify the stimulus from a cut, many say. The eurozone is in recession and unemployment is at 12 percent — highest since the euro was launched in 1999. Economic indicators are shaky enough to suggest a hoped-for recovery later this year might be delayed. Some of the 17 national central bank heads who sit on the ECB's council have apparently pushed for a cut. Draghi conceded that the topic came up at the December and March meetings.

Instead of cuts, the ECB has offered unlimited amounts of short-term credits to banks, available at 7-day, one-month and three-month intervals, in hopes that money will filter through to the economy as loans.

Given signs of continued economic weakness, Draghi may again stress that the take-all-you-want approach to lending will remain in place for as long as needed.