ECB holds rates unchanged

The European Central Bank held its main interest rate steady at a record low of one percent today as governors tried to keep the Greek debt crisis from overwhelming the 16-nation eurozone.

Meeting in Lisbon for a twice-yearly gathering away from the ECB's Frankfurt headquarters, governors faced the biggest challenge to Europe's single currency in its 11-year history.

In Greece meanwhile, unions mobilised for fresh protests against draconian budget cuts and taxes required to obtain 110 billion euros (143 billion dollars) in aid from the European Union and International Monetary Fund.

Tension across Europe grew after the international ratings agency Moody's warned that fallout from the Greek crisis presented a risk of "contagion" for the credit rating of banks in Britain, Ireland, Italy, Portugal and Spain.

Banking systems in those countries faced "very real, common threats," a Moody's statement said.

Yesterday, euro finance chief Jean-Claude Juncker dismissed a doomsday scenario of the euro's collapse.

"A failure of the eurozone would mean its implosion and its disintegration stage by stage," the Luxembourg prime minister said.

"It's a risk I don't see," he added before telling financial markets which have highlighted the crisis they were reacting with no "objective foundation."

But US economist Nouriel Roubini, best known as one of the voices predicting the 2008 global financial meltdown, disagreed.

"The break-up, the implosion of the euro(zone) cannot be ruled out at this point. The contagion is a real possibility and not only for countries most at risk," Roubini told the Italian daily La Repubblica.

While Portugal is considered one of the eurozone countries most at risk of being attacked on financial markets, the decision by the ECB to meet in Lisbon was taken more than a year ago, months before the Greek debt crisis erupted.

The cost of borrowing for Lisbon and neighbouring Madrid has climbed owing to public deficits that are more than three times above the eurozone's limit of three percent of output.

Their debt is nonetheless much more contained than that of Greece, where a protestor on Wednesday hurled a firebomb into a bank, killing three people.

Greek President Carolos Papoulias warned the nation it had "reached the edge of the abyss."

On Monday, the ECB did an unprecedented U-turn by saying it would accept Greek debt as collateral for central bank loans even if the debt was downgraded to junk status, as the ratings agency Standard and Poor's has done.

The move provided crucial relief to Greek banks and the government, and was approved by analysts who have nonetheless begun to wonder if the central bank is being subjected to political pressure.

"For the first time in its short history, the bank's independence could be seriously threatened," UniCredit chief economist Marco Annunziata said.

Many now expect the ECB to resort to more aggressive measures such as buying government bonds to lend exceptional support.

ING rates strategist Padhraic Garvey called this "the nuclear option as it would taint the ECB both politically and in terms of its asset/liability mix."

But "only the ECB can print euros to save the system," he noted.

The Greek crisis has slashed the value of the euro against that of other major currencies, something which cuts both ways since it boosts eurozone exports but also raises the cost of energy paid for in dollars.

The euro plunged to its lowest level for more than one year today, hitting 1.2737 dollars.