EU Leaders Seek ECB Assistance to Deal with Eurozone Crisis

on Jul 2, 2012
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According to a Bloomberg article, published on 2 July 2012, European leaders are now turning to the European Central Bank (ECB) so as to seek assistance to reinforce gains following the Eurozone leaders’ moves to calm markets and accelerate Eurozone integration.

The ECB is expected to offer help on July 5, with economists predicting interest rate cuts. According to a Bloomberg survey, the ECB will lower its benchmark interest rate by at least 25 basis points, to a record low of 0.75 percent. An interest rate cut can potentially help lenders in debt-burdened parts of the bloc by reducing the cost for the central bank’s emergency loans. The ECB is expected to cut deposit rates as well with the purpose of discouraging banks from parking excess liquidity at the central bank.

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!m[](/uploads/story/135/thumbs/pic1_inline.png)Although the outcome of the upcoming ECB policy meeting is still unclear, Bloomberg reports that the ECB does have a track record of action following political progress such as the progress made at the last EU summit. What the Eurozone leaders agreed was to inject EU bailout funds into the Spanish financial institutions, as reported by the Financial Times. The agreement came after Italy and Spain forced the other EU leaders to agree on short-term rescue measures, by blocking progress on all other items on the summit agenda.

The most important part of the Eurozone deal, however, is the creation of a single banking supervisor, with this being a step to a future banking union. The new single supervisor, which may be established before the end of the year, will be run by the ECB. In consequence, the agreement of the Eurozone leaders will add to the powers of the ECB, with Bloomberg noting that clauses in existing EU treaties could allow the ECB to exercise prudential oversight of banks and other non-insurance financial companies. The establishment of an ECB-run single supervisor is also a prerequisite for the direct recapitalisation of banks.

Bloomberg reported that Joerg Asmussen, a member of ECB’s Executive board, told the Greek newspaper Kathimerini that “the summit produced several tangible outcomes that will help us address the challenges”. The comments were confirmed by the ECB on June 30. The ECB President Mario Draghi on the other hand was “quite pleased with the outcome of the European council” since it demonstrated “the long-term commitment to the euro by all member states of the euro area”.

Nevertheless, it remains to be seen how quickly the decisions of the Eurozone leaders will actually be implemented. Chancellor Angela Merkel told Germany’s lower house of parliament that the process of establishing a single supervisor could take “several months or perhaps a year”.
In addition, some large EU banks seem to be uncomfortable with a system which excludes the
UK. “London as Europe’s strongest financial centre has to be included. Financial crises don’t stop at the channel,” noted Andreas Schmitz, president of Germany’s association of commercial banks, as quoted by the FT.

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