ECB cuts rates but ‘solutions up to states’

The European Central Bank cut its key rates yesterday, but in­sisted it is up to eurozone governments to solve the debt crisis as EU leaders gathered in Brussels for a make-or-break crisis summit.

The ECB’s governing council, under intense pressure to come to the euro’s rescue, lowered eurozone borrowing costs for the second time in two months, cutting the rate for its main refinancing operations by a quarter of a percentage point to one per cent.

The ECB has played fire-fighter throughout the two-year long sovereign debt crisis and its president, Mario Draghi of Italy, told a news conference that the bank would continue to play its part.

But ultimately it was up to governments to “do their utmost” to restore shattered confidence in the single currency, he said.

“The ultimate decisions are in the hands of leaders,” Mr Draghi said.

Looking ahead to the summit in Brussels, Mr Draghi said “what’s happening is a redesign of the fiscal agreement in a way that would rebuild confidence”..

In addition to cutting its rates, the ECB said it would extend the term of its liquidity-providing operations to three years, ease the requirements for the collateral put up in return for the loans, and cut the mandatory reserves eurozone banks must hold at the central bank by half to one per cent. That will provide reassurance that the ECB will support the region’s banks in the long haul, as previously funds were available only for up to one year.

Nevertheless, the Italian, who took over the reins of the ECB in November, appeared distinctively cool towards larger scale central bank action.

Among some of the proposals recently put forward are for central banks to lend funds to the International Monetary Fund, which could then be used as a safety net for eurozone sovereign debt. But Mr Draghi told re­porters such action would raise “complex legal issues” and he was adamant that the ECB must not be used simply to print money to buy up the mountain of debt that many eurozone countries have amassed.

That went against the very rules that the eurozone and the wider EU was built on, he argued.