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E.C.B. Chief Says Cyprus Shows Commitment to Euro E.C.B. Chief Says Cyprus Shows Commitment to Euro
(31 minutes later)
FRANKFURT — The head of the European Central Bank said Thursday that the recent bailout of Cyprus showed the bank’s determination to shore up the euro — though he acknowledged that an initial decision to impose a tax on small bank deposits was “not smart, to say the least.” FRANKFURT — The head of the European Central Bank said Thursday that the recent bailout of Cyprus showed the bank’s determination to shore up the euro, though he acknowledged that an initial decision to impose a tax on small bank deposits was “not smart, to say the least.”
Mario Draghi, president of the E.C.B., also noted during a press conference in Frankfurt that the error of the bank deposit tax was quickly corrected, and that Cyprus was “no template” for future crises.Mario Draghi, president of the E.C.B., also noted during a press conference in Frankfurt that the error of the bank deposit tax was quickly corrected, and that Cyprus was “no template” for future crises.
He stressed the E.C.B.’s willingness to take action in response to threats to euro zone stability. “If anything, the events on Cyprus have reinforced the governing council’s determination to support the euro while maintaining price stability and acting within our mandate,” he said. He emphasized the E.C.B.’s willingness to take action in response to threats to euro zone stability. “If anything, the events on Cyprus have reinforced the Governing Council’s determination to support the euro while maintaining price stability and acting within our mandate,” he said.
The muted market reaction to events in Cyprus showed “we are now in a position to cope with serious crises without them becoming existential or systemic,” he said. The muted market reaction to events in Cyprus showed that “we are now in a position to cope with serious crises without them becoming existential or systemic,” he said.
Mr. Draghi spoke at a press conference after the governing council of the E.C.B. left its benchmark interest rate unchanged at a record-low 0.75 percent, as expected. Mr. Draghi spoke at a press conference after the bank’s Governing Council left its benchmark interest rate unchanged at 0.75 percent, a record low, as expected.
The Bank of England also kept its benchmark interest rate unchanged on Thursday amid concern that the British economy fell back into recession at the beginning of the year.The Bank of England also kept its benchmark interest rate unchanged on Thursday amid concern that the British economy fell back into recession at the beginning of the year.
The Bank of England, the central bank, decided to leave its main interest rate at the record low of 0.5 percent, where it has been since March 2009. It also held its program of bond buying, a way to stimulate the economy, at £375 billion, or about $568 billion.The Bank of England, the central bank, decided to leave its main interest rate at the record low of 0.5 percent, where it has been since March 2009. It also held its program of bond buying, a way to stimulate the economy, at £375 billion, or about $568 billion.
In Europe, Mr. Draghi has faced pressure to reassure financial markets that he would not let a banking crisis in Cyprus threaten the euro zone’s stability. In Europe, Mr. Draghi has faced pressure to reassure financial markets that he will not let the banking crisis in Cyprus threaten the euro zone’s stability.
Since Mr. Draghi’s last press conference a month ago, the second-largest bank in Cyprus has been shut down, wealthy depositors in Cypriot banks have been presented with huge losses on their holdings, and the country has imposed restrictions on large transfers of money to prevent a flight of capital. Since Mr. Draghi’s last press conference a month ago, the second-largest bank in Cyprus has been shut down, wealthy depositors in Cypriot banks have been required to take huge losses on their holdings, and the country has imposed restrictions on large transfers of money to prevent a flight of capital.
The E.C.B. was a key player in the events, in effect threatening to withdraw support for Cypriot banks unless local political leaders agreed to a bailout plan that would shift some of the cost to rich depositors, many of them Russians.The E.C.B. was a key player in the events, in effect threatening to withdraw support for Cypriot banks unless local political leaders agreed to a bailout plan that would shift some of the cost to rich depositors, many of them Russians.
The turmoil in Cyprus has begun to blunt business confidence in the euro zone, threatening an already shaky recovery. Data from Markit, a research firm, confirmed on Thursday that sentiment continued to worsen, as a survey of business activity showed a marked drop in France and a stalling of growth in Germany, the largest and most robust euro zone economy.The turmoil in Cyprus has begun to blunt business confidence in the euro zone, threatening an already shaky recovery. Data from Markit, a research firm, confirmed on Thursday that sentiment continued to worsen, as a survey of business activity showed a marked drop in France and a stalling of growth in Germany, the largest and most robust euro zone economy.
The index fell to 46.4 in March, down from 47.9 in February and slightly lower than a preliminary reading of 46.5 two weeks ago, Markit said. The index has been below 50, the level that separates contraction from growth, in all but one of the 20 previous months. The index fell to 46.4 in March from 47.9 in February, and was slightly lower than a preliminary reading of 46.5 two weeks ago, Markit said. The index has been below 50, the level that separates contraction from growth, in all but one of the 20 previous months.
The figure for France was 41.3 in March, down from 43.7 in February. The March figure was the lowest since February 2009. The figure for France was 41.3 in March from 43.7 in February. The March figure was the lowest reading since February 2009.
Germany’s economy, while still nominally growing, slowed to a crawl in March, with the index falling to 50.6 from 53.3 in February.Germany’s economy, while still nominally growing, slowed to a crawl in March, with the index falling to 50.6 from 53.3 in February.
In keeping with the bank’s mandate to ensure price stability in the 17 members of the euro zone, Mr. Draghi said that in coming weeks the E.C.B. would closely monitor the outlook for prices.In keeping with the bank’s mandate to ensure price stability in the 17 members of the euro zone, Mr. Draghi said that in coming weeks the E.C.B. would closely monitor the outlook for prices.
With inflation already below the E.C.B.’s target of about 2 percent, the statement could be interpreted as a sign that policy makers were more open to cutting rates in order to prevent deflation, a broad decline in prices that can be more destructive than inflation.With inflation already below the E.C.B.’s target of about 2 percent, the statement could be interpreted as a sign that policy makers were more open to cutting rates in order to prevent deflation, a broad decline in prices that can be more destructive than inflation.
Mr. Draghi also said, however, that risks to price stability are “broadly balanced.” He is under pressure to reassure investors and euro zone citizens that the E.C.B. will act to prevent an exodus of deposits from other weak countries like Italy or Spain. A bank run in those countries would pose a more serious threat to the euro than tiny Cyprus. Mr. Draghi also said, however, that risks to price stability were “broadly balanced.” He is under pressure to reassure investors and euro zone citizens that the E.C.B. will act to prevent an exodus of deposits from other weak countries, like Italy or Spain. A bank run in those countries would pose a more serious threat to the euro than tiny Cyprus.
There are limits, however, to what the E.C.B. can do without violating its mandate. The E.C.B. can supply banks with cheap loans, but it cannot offer cash to replenish depleted bank reserves.There are limits, however, to what the E.C.B. can do without violating its mandate. The E.C.B. can supply banks with cheap loans, but it cannot offer cash to replenish depleted bank reserves.
While European leaders have agreed to give the E.C.B. power to oversee euro zone banks, they remain divided on measures to protect bank depositors and to deal with failed financial institutions.While European leaders have agreed to give the E.C.B. power to oversee euro zone banks, they remain divided on measures to protect bank depositors and to deal with failed financial institutions.
Events in Cyprus, which were unprecedented in the euro zone, have added urgency to the debate about a banking union.Events in Cyprus, which were unprecedented in the euro zone, have added urgency to the debate about a banking union.
“The ongoing busting of euro area taboos makes it more urgent to deliver economic recovery, as well as to accelerate banking union,” analysts at Barclays Capital wrote in a note before the E.C.B.’s meeting.“The ongoing busting of euro area taboos makes it more urgent to deliver economic recovery, as well as to accelerate banking union,” analysts at Barclays Capital wrote in a note before the E.C.B.’s meeting.
Jack Ewing reported from New York and Julia Werdigier contributed from London.Jack Ewing reported from New York and Julia Werdigier contributed from London.