Relief in Euro zone as ECB extends availability of emergency loans to banks

Thursday, December 2nd 2010 - 23:05 UTC

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The European Central Bank moved Thursday to contain the continent's government debt crisis, extending the availability of emergency loans and keeping its benchmark lending rate at one percent.

However ECB resisted pressure to embark on a new bond-buying plan to ease the borrowing costs of debt-laden Ireland, Portugal, Spain and other countries.

Nonetheless, traders said the bank is quietly buying the sovereign bonds.

The central bank's president, Jean-Claude Trichet, was reticent about the bond buying but emphasized that a bond purchase program started after the bailout of Greece last May is continuing.

The bank's actions seemed to assure investors about the soundness of the governmental bonds. Interest rates on Irish, Portuguese and Spanish bonds all dipped in late-day trading.

The central bank said it will continue to make cheap, emergency loans available to commercial banks in Europe, at least through the end of March, and to maintain its one percent benchmark lending rate for the 20th straight month.

The European Central Bank is faced with spurring economic growth at the same time as Greece, Ireland, Portugal and Spain are struggling to cut their budget deficits through a combination of cuts in key social welfare programs and increased taxes.

Trichet said the current low lending rate was appropriate and described the bank's overall monetary policy as “accommodative.”

The value of the Euro fluctuated throughout the day Thursday as investors weighed Trichet's comments and the central bank's willingness to intervene to contain the increased governmental borrowing costs.

By the end of the day, the Euro value against the dollar rose to more than $1.32.

Earlier this year, Greece was forced to take a bailout from its European counterparts and the International Monetary Fund, and Ireland followed suit last week. The fear among European financial experts and policymakers is that Portugal and Spain may soon have to do the same.